What are the tax advantages of a Traditional IRA?
The interest your traditional IRA earns is tax-deferred, which means you don’t have to pay tax on it until you withdraw the money. Thus, you benefit from compounding as your untaxed interest continues to earn more interest. In 2002, you may contribute up to $3,000 to your IRA (or $3,500 if you are 50 or older). If your earned income is less than that, you may only contribute up to the amount of your earned income. If you have more than one IRA, including a Roth IRA, the total amount you may contribute to all of them combined is $3,000 or the amount of your earned income, whichever is less. Your contributions may be tax-deductible, which would reduce your income tax bill. This depends on whether you are an active participant in an employer-sponsored retirement plan. If you are, your income level determines whether your traditional IRA contributions will be deductible. If you are not sure whether you are an active participant in a retirement plan at work, see the question I don’t contrib
