16.3.1. Traditional IRAs
Traditional IRAs allow individuals to contribute to a retirement account with pre-tax dollars. In other words, individuals are permitted to deduct a certain amount of money from their taxable income if they put it into an IRA, which will reduce the amount they will pay in taxes. Taxes on the contributions and earnings in the account are deferred until the time of withdrawal. At withdrawal, all contributions and earnings are taxed at the individual’s ordinary tax rate. The investment advantage of an IRA is that income that normally would be taken out in taxes can stay in the account and earn additional income. Moreover, most people are at a lower tax rate at retirement than when they make contributions.
Most individuals will make pre-tax contributions to their traditional IRAs. Any after-tax contributions can be withdrawn tax-free, but the individual must show evidence that taxes w
