Individual Retirement Accounts (IRAs) are powerful savings vehicles with tax advantages to help Americans prepare for retirement. One of the most frequently asked questions among investors regarding these savings tools is “How can I determine whether my IRA is traditional?” Below we outline its distinguishing features as well as steps you can take to confirm its type.
First Steps
To understand a traditional IRA properly, it’s necessary to gain an understanding of its basic components. A traditional IRA is a tax-deferred retirement account in which contributions made may be tax deductible in the year they’re made while withdrawals during retirement will only incur taxes upon withdrawals from it.
Verify Your Contribution Deductions Now
Traditional IRAs stand out by accepting tax-deductible contributions (subject to income and coverage limits). If your contributions to an IRA have been deducted on previous tax returns, that could be an indicator that it’s a traditional one; look back over your records to look for mention of deductions related to it.
Review Your Account Statements
Each financial institution sends out periodic statements for your IRA account either electronically or by mail, detailing what type of account it is (traditional, Roth, SEP or SIMPLE). On these statements you’ll see details regarding traditional, Roth, SEP or SIMPLE.
Review Tax Forms
Each year, your IRA provider should send out Form 5498 that contains details about your contributions; if Box 7 of this form shows “Traditional IRA”, that indicates your account type as such.
Find Your Financial Institution
If you are still confused, the easiest and simplest way to confirm which IRA type yours is is contacting the financial institution where your IRA was opened – they should know all the details regarding it as they can tell whether it’s traditional versus another kind.
Analyze Withdrawal Rules
If you’ve withdrawn money from an IRA in the past, be aware of any tax consequences. Traditional IRA distributions tend to be tax-payable and under the age of 59 1/2 could incur an early withdrawal penalty of 10% until one of several exceptions apply – another sign your IRA could be traditional! If taxes and potential penalties on withdrawals were paid upon making withdrawals it indicates its traditional nature.
Rollover History
Have You Moved Funds Into an IRA from Another Plan Without Any Immediate Tax Impact?
If your funds were moved seamlessly between plans without incurring immediate tax consequences, that likely constitutes a traditional IRA. 401(k) funds often transition smoothly over to traditional IRAs while maintaining tax deferral.
Conclusion
Understanding what kind of IRA you own is vitally important when it comes to tax planning, withdrawal strategies and overall financial analysis. If it turns out you own a traditional IRA account, make sure you familiarize yourself with its rules and benefits so as to maximize retirement savings.
