An individual retirement account (IRA) is a perfect way to supplement a work-based retirement vehicle. Individual taxpayers can open either a traditional individual retirement account (IRA) or a Roth IRA. For 2024, the maximum contribution you can make to an IRA is $7,000 ($8,000 for those 50 or older). 

Only the traditional IRA allows a tax deduction when it's opened. You must have income (“taxable compensation”) to open one. Additionally, the ability to deduct contributions can be limited for those with a retirement plan at work (or a spouse who has one). Finding further information on the traditional IRA isn’t difficult, but a few important factors aren’t overly apparent. Below are five.

1. There Are Limits on Investments

A traditional IRA is a type of investment vehicle that earns money tax-free until funds are withdrawn and is not an actual investment. For example, the custodian—the financial company that offers and oversees the traditional IRA—will also offer a 澳洲幸运5官方开奖结果体彩网:choice of investments varyi𝄹ng in return and risk, such as Treasury bills, money market funds, mutual funds, stocks, an𒈔d bonds.

You can't invest in just anything, however. Certain types of investments are 澳洲幸运5官方开奖结果体彩网:prohibited from being in IRAs, such as life insurance, antiques, or collectibles.

2. The Beneficiary Form Needs to Be Kept Upd🐼ated

The 澳洲幸运5官方开奖结果体彩网:beneficiary form tells the custodian what to do with the funds should the account holder die. Without the form, loved ones run the risk of not receiving the money quickly or in full. This form also needs to be kept updated, especially if the account holder goes through a divorce or other major life changes.

3. There Are Mandatory Withdrawals

Not all retirees need to rely on an IRA for living expenses. But regardless of the income you might have 澳洲幸运5官方开奖结果体彩网:after you retire, the IRS imposes 澳洲幸运5官♌方开奖结果体彩网:required minimum distrib꧋utions (RMDs). So, you'll need to begin withdrawing money from your traditional IRA generally by April 1 of the year following the year in which you turn♍ age 73.

Failing to do so results in hefty tax penalties—25% for every dollar not withdrawn. This is one area where Roth IRAs are a better alternative—they have no RMDs until the account holder dies.

4. No Borrowing Is Allowed

Some retirement plans allow short-term loans, but the traditional IRA isn’t one of them. If any money is borrowed from an IRA, then the entire IRA is disqualified. According to the IRS:

"If the owner of an IRA borrows from the IRA, the IRA is no longer an IRA, and the value of the entire IRA is included in the owner's income."

Once the IRA is disqualified, the entire value of the IRA becomes income. If, on the other hand, the IRA is pledged as collateral (no amount borrowed), then the amount pledged is treated as distributed.

5. Real Estate Is a Valid Holding

An IRA doesn’t have to hold only equities, bonds, and other Wall Street-type investments. The account can 澳洲幸运5官方开奖结果体彩网:hold real estate, too. The catch is that the real estate has to be a business properওty; the acco✤unt holder can’t purchase a second home or pay off a current home. A house can be bought and flipped as an investment property.

The IRS has strict rules regarding real estate in an IRA. Because of the higher dollar value and the less liquid nature of real estate, this option is only for the more sophisticated investor and requires having a 澳洲幸运5官方开奖结果体彩网:self-directed IRA (SDIRA), a type that allows you to have a wider range of investments. Talk to the appropriate experts before considering adding real estate or opening an SDIRA.

The Bottom Line

Traditional IRAs offer a great chance to save for retirement, but several details and restrictions aren't generally known, such as accessibility of funds and what is and isn't a proper investment within the account.