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Traditional IRA A retirement arrangement that allows tax deferred earnings and deductible contributions. What are the tax benefits of a Traditional IRA? IRA stands for Individual Retirement Arrangement and it is an investment vehicle created by the US government to allow working individuals to save up to $4000 in year 2006 for their retirement. With a Traditional IRA you may be able to deduct all or part of your contributions from your taxable income. The investment earnings of your IRA are not subject to federal income tax until distributions (withdrawals) are made. Who is eligible to contribute to a Traditional IRA? You can establish and make contributions to a Traditional IRA if you: 1. received taxable compensation during the year; and 2. have not yet reached the age of 70 1/2. If a married person does not work or has limited compensation, his or her spouse can contribute up to $4,000 to a spousal IRA. Spousal IRAs can be set up even if the taxpayer does not contribute to his or her own IRA, or contributions may be made for both spouses. How much can I contribute? As per the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the annual contribution limit for both Traditional and Roth IRAs will gradually increase from $4,000 to $5,000 in the year 2008.
Indexed for inflation after 2008
Higher Limits for Age 50 or over Workers aged 50 or over will be able to contribute a bit more to their IRAs. This provision is intended to allow older workers who haven't saved enough for retirement to make up for lost time and "catch up" on their contributions. Those aged 50 and over before the end of the taxable year will be eligible to contribute $1000 more than the regular limits. What is an "Active Participant"? Generally, you will be considered an "active participant" if you are covered by one or more of the following employer-sponsored retirement plans:
Can I contribute to Traditional IRA if I am an "Active Participant"? If you are an "Active Participant" you may be able to deduct all or part of your contributions from your taxable income. It depends on your Adjusted Gross Income (AGI). Please see IRS Publication 590. If you are not covered by an employer sponsored retirement plan, your IRA contribution may be totally deductible. If you are covered by an employer sponsored retirement plan and are single, the deductible amount of your contribution will be determined by your Adjusted Gross Income (AGI). Please see IRS Publication 590. If you are not covered by an employer sponsored retirement plan but your spouse is covered, your maximum deductible contribution is determined by taking $160,000 minus your AGI and multiplying the result by 0.3. When can I withdraw from a Traditional IRA? Once you reach age 59 1/2, you are entitled to receive IRA distributions without any penalty. However, if you are under age 59 1/2 and receive an IRA distribution, an additional penalty of 10% will apply, unless you claim one of the following exceptions:
Generally, the first distribution must be made by April 1st of the year following the year age 70 1/2 is attained. In subsequent years, the distribution must be made by December 31st. The participant must determine the minimum amount required to be distributed each year. The participant can always withdraw more than the required minimum distribution. If you need more information on Required Minimum Distribution, please see IRS Publication 590. *This information should not be construed as providing tax or legal advice. Please consult with your tax advisor or attorney regarding your individual situation.
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