In retirement terminology, the term Traditional IRA refers to a United States retirement plan which allows individuals to invest pre-taxed income of up to a certain amount per year in an account were the investments can grow tax-deferred. Contributions to a Traditional IRA may be tax-deductible, depending on the taxpayer’s filing status.
A Traditional IRA or Individual Retirement Account allows a person to contribute up to a specified amount of their income per year into a tax-deferred retirement account where the money is not taxed until withdrawn at retirement. A Traditional IRA will generally be managed by a mutual fund, bank or brokerage firms, and the funds deposited into such accounts can be invested in stocks, bonds, mutual funds or any other asset. Withdrawals become mandatory when the owner turns 70 and are taxed as normal income. As with other U.S. retirement plans, early withdrawal from the Traditional IRA plan carries a 10% IRS penalty. Participants are also allowed to rollover the distribution to another IRA and may withdraw funds early, depending on the plan.