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9. Traditional IRA

Updated: May 13, 2022

• If you invest in the traditional IRA, you will have a tax-deferred income of $5,000 at 32% or $1,600. This would be taxable income when there is a distribution from the IRA.

• Your tax bracket is key — do you have a crystal ball on where your income will fall at retirement? Both the original investment and earnings will be fully taxable as ordinary income when distributed.

• The ideal situation is to be in a high tax bracket at the time the funds are contributed and a low tax rate when distributions are taken.

• The traditional IRA has a required minimum distribution at age 72 (under current tax law).

• Do you have other retirement funds that also have a required minimum distribution (RMD) such as a 401(k)? Required distributions from several qualified plans or IRAs could place you in a higher income bracket which may subject you to the Net Investment Income Tax (NIIT) or your social security benefits may be taxable.

• Traditional IRAs allow for the qualified charitable distribution — funds donated directly from your IRA to a qualified charity would satisfy the RMD and bypass your

individual income tax return.

Roth vs Traditional IRA:

When making the decision of how to invest your retirement funds, you should consider several factors. Say, for example, that your tax rate is 32% and you plan to invest $5,000 in an IRA which is earning 6% interest. And, further, neither you nor your spouse has a qualified plan through work so the full amount would be deductible. Do you take advantage Of the current year's reduction in taxable income or plan for the tax-free distribution of earnings at retirement?

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