If you’re like many workers, you use an individual retirement account (IRA) as a retirement savings vehicle. There are more than 25 million IRAs in the United States, and they hold an aggregate balance of more than $2.4 trillion. The average balance is $119,804, but the top 12 percent of accounts have balances of greater than $250,000.1
While a traditional IRA can be a very effective tool for accumulating retirement assets, it also presents some interesting challenges. With a traditional IRA, you may be able to take advantage of deductions for your current-year contributions, depending on your income. Your investments in the IRA also grow on a tax-deferred basis.
However, your distributions from the IRA in retirement are taxed as income. That means if your tax rate is higher in retirement than it is today, the distribution taxes could negate the benefit you received from the deductions.