What Is Traditional IRA And Who Should Have One?

IRA is Individual Retirement Account that serves as one of the best investment for retirement. Employees can use this to their benefit as the capital along with the dividends are tax free. The tax deduction is however dependent on the individuals income, tax status and other factors. Individuals who are looking at IRA can invest their money with banks or retail brokers. The investment instrument can be stocks, bonds and funds as per the investor’s choice.

IRA for employee

            Financial experts assess that 85% of an individual’s income is required during retirement. For this, employer contributed retirement plan is not sufficient. It is therefore important to have an IRA contributed by the employee. IRA helps an employee in:

  • Making use of tax- free investment plans
  • Visiting other retirement plans other than the one provided by the employer
  • Adding to the investment provided by the employer.

Contribution towards IRA

  • IRA plans have fixed yearly contribution amount set by the government.
  • For age 50 and above, the annual contribution to the IRA is higher if the account was opened late.
  • For the years 2015 and 2016, the contribution $5500 or less. For 50 years and above, the amount is $6500.
  • Tax deduction for the contribution can be availed in full if the individual does not have a retirement plan at work. Otherwise, tax deduction is limited.
  • If in case, contributions are made at or over 70.5 years old or contribution is made over the allowed cut off then the extra is taxed at 6%.


Distributions from IRA

  • The returns from the account are treated as any income and are therefore taxable.
  • At the age of 70.5, individuals start receiving distributions from the account.
  • An employee can choose to distribute the contribution when the employment is terminated, disability, death, hardship or when age 59.5 is reached.


Types of IRA plans

  1. Full accrued benefit: This plan allows the distribution at a pre-set retirement age.
  2. Early retirement: In these early distributions is made in situations like employment termination due to death, severance, and early retirement or at age 62.



Rollover is the investment of the returns from the IRA into another retirement plan. This amount is not taxable unless it has been withdrawn from the account. When the returns are not rolled over then it is taxable. The roll over should be made within 60 days from when the distribution has been initiated. There are 3 ways in which the returns can be rolled over.

  1. Direct rollover: The distributions/returns received from the IRA is invested in another retirement account. It can be arranged to be directly deposited in the new retirement account.
  2. Trustee to trustee rollover: In this, the distributions from one IRA is transferred to another IRA with the same financial institution.
  3. 60 day rollover: The distribution received from the IRA can be invested into another retirement account either in full or partially.

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