Individual retirement arrangement or IRAs are often referred to as traditional IRAs in the United States. The IRA is typically held at in a bank or a brokerage that serves as custodian institution, and it can be invested in practically anything that the custodian will allow, with most cases being certificates of deposit, stocks and mutual funds.



Unlike Roth IRAs, there is only one criterion for being allowed to contribute to a traditional IRA, and that is proof of an income that is sufficient to make contributions. There is however one provision of a Traditional IRA that has fairly rigid eligibility requirements with regard to income, filing status, and availability of other retirement plans, and that is the tax-deductibility of the contributions.

With a traditional IRA, any transactions in the account whether interest, dividends, or capital gains are not typically subject to tax while the funds remain in the account, although withdrawing them will mean that you will have to pay federal income tax. In contrast, contributions to a Roth IRA are not tax-deductible, although certain qualified withdrawals may be free from taxes.

Traditional IRAs also tend to have more restrictions on withdrawals than Roth IRAs do. With both types of IRAs however, all the transactions inside an account are not subjected to taxes.

The most important advantage of a Traditional IRA, is of course that contributions are often tax-deductible. Any taxpayer who contributes $4,000 to a traditional IRA and is in the twenty-five percent bracket, will qualify for a $1,000 benefit in that year. Since qualified distributions are considered taxable as ordinary income, the long-term benefits of the traditional IRA can only be compared to those of a Roth IRA if the taxpayer reinvests the tax benefit for the current year.

Traditional IRAs also offers increased incentives over Roth IRAs, particularly if the taxpayer is in a lower tax bracket during his or her retirement. Still another advantage is that the taxpayer will be able to get the tax benefit immediately. With Roth IRAs, there is the possibility that Congress may decide to tax Roth IRA distributions over the next several years.

Traditional IRA come with some disadvantages as well, one of which is the eligibility requirement for tax-deductibility. A persons income must fall below a specific level upon filing, particularly if he or she is eligible for a retirement plan at work.

In addition, all of the withdrawals from a Traditional IRA are typically included in gross income, and these are also subject to federal income tax, although certain nondeductible contributions are exempted. A traditional IRA is generally not a good idea if a person intends to go into buy-and hold or dividend-seeking activities, since stocks in an IRA will entail losing the tax advantages of dividends and capital gains.

Finally, what is possibly the biggest disadvantage of Traditional IRAs is that they force the distributions based on age requirements. Withdrawals have to begin at age 70 and a half for example, and failure to withdraw during this period will result in the confiscation of half the by the IRS.