Traditional IRAs
- How can a Traditional IRA help me save for retirement?
- Who can contribute, and how much?
- What is an IRA catch-up contribution?
- Are all Traditional IRA contributions tax deductible?
- Should I contribute if I can't take a deduction?
- Will I get a tax credit for my contribution?
- Can Traditional IRA assets be moved?
- Can other assets be combined in a Traditional IRA?
- When can I use my Traditional IRA assets?
- Am I ever required to take funds from my Traditional IRA?
- For more information...
- IRA Planning Tools
Today, more than ever before, one of the greatest challenges facing American workers is assuring their financial security in retirement. With uncertainty over the adequacy of Social Security to meet the needs of future retirees, Americans now and in the future will be forced to rely more heavily on their own resources to support their retirement lifestyle.
At the same time, the world of employer-based pensions is changing, too. Much less common today is the employer-sponsored defined benefit plan, the kind of plan that assures former employees a dependable income throughout their retirement years. The pension world is changing to one in which employees must make the decision to save for retirement. And, even when an employer plan is available, employees may be required to make most or all of the contributions.
How can a traditional IRA help me save for retirement?
Individual Retirement Arrangements - IRAs - are one of the most viable answers to the question of how to assure a secure retirement.
Traditional IRAs offer:
- independence, and can be opened and funded without any employer participation
- immediate tax benefits, with contributions and/or earnings tax-deferred until retirement
- accessibility, with funds always available, something not generally true of employer plans
- flexibility, because there is no minimum contribution in any year
Who can contribute, and how much?
The requirements for contributing to a Traditional IRA are few.
You can contribute:
- if you are under age 70½ for the year that the contribution is being made
- if you have earned income from employment equal to or greater than your IRA contribution
For 2001, the annual contribution limit for a Traditional IRA was $2,000 ($4,000 for married couples) or 100 percent of earned income, whichever is less. EGTRRA increases annual contribution limits as follows:
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Beginning in 2009, the maximum contribution amount will be indexed for cost-of-living adjustments (COLA) in $500 increments.
What is an IRA catch-up contribution?
Effective for tax years beginning on or after January 1, 2002, individuals who attain the age of 50 before the end of the taxable year may be eligible to contribute an additional amount to a Traditional and/or Roth IRA as a catch-up contribution as follows:
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Are all Traditional IRA contributions tax deductible?
One of the immediate benefits of contributing to a Traditional IRA is a tax deduction many receive on their income taxes. IRA contributors receive a 100% deduction on their annual contribution if:
- they do not receive benefits under an employer's retirement plan, or (if they do)
- their modified adjusted gross income is no more than $70,000 if married and filing jointly or $50,000 for single filers (these amounts are for 2005, and will continue to increase through 2006 and 2007, respectively)
For those who are participants in an employer plan, IRA deductibility is gradually phased out above these income levels.
Should I contribute if I can't take a deduction?
Yes! There are significant benefits to making an IRA contribution even if it is not currently tax deductible.
A nondeductible contribution:
- grows tax-deferred, with earnings sheltered from taxation until withdrawn
- has already been taxed, and will not be taxed again
- whether deductible or nondeductible, is a step closer to a secure retirement
Quite simply, no taxable, non-IRA investment of the same type will generate nearly the same earnings over a lifetime of saving as nondeductible IRA contributions will. (The Roth IRA may also be similarly beneficial.)
Will I get a tax credit for my contribution?
For tax years 2002 through 2006, certain individuals may receive a non-refundable tax credit (not to exceed $1,000) for contributions made to Traditional and Roth IRAs. If you are eligible, the tax credit is equal to the applicable percentage on up to $2,000 of a "qualified retirement savings contribution" which includes annual Traditional and Roth IRA contributions. To be eligible for the tax credit, you must:
- have attained age 18 before the end of the taxable year
- not be a dependent or a full-time student
- have adjusted gross income (AGI) within limits
The following chart highlights the income levels for eligibility for the tax credit and the applicable percentage used to calculate the tax credit:
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Please consult with your tax advisor for additional information.
Can Traditional IRA assets be moved?
Under certain circumstances IRA holders may wish to move their IRA from one financial organization to another. IRA holders can take comfort in the fact that their IRA assets are always available to them.
IRA Assets may be:
- withdrawn (distributed) and redeposited elsewhere (known as a rollover)
- moved to another organization (known as a trustee-to-trustee transfer)
Can other assets be combined in a Traditional IRA?
Contributions made by an employer through a retirement plan known as a simplified employee pension (SEP) are actually contributed to a Traditional IRA, and they can be combined with regular IRA contributions. Effective in 2002, after-tax assets from a "qualified retirement plan" and assets held in governmental 457 plans are eligible for rollover to a Traditional IRA. To protect the option of someday moving them to another employer plan, such assets are often best kept in a separate IRA that contains no other contributions.
When can I use my Traditional IRA assets?
Unlike most employer retirement plans in which access to funds is limited to such events as change of employment, plan termination, reaching retirement age, death or disability, access to your IRA funds is guaranteed, always. However, until age 59½ there is a 10 percent early distribution penalty unless you qualify for an exemption due to one of the following reasons:
- disability
- qualifying medical expenses
- qualifying education expenses
- unemployment (under certain conditions)
- qualifying first home purchase
- death
- receipt of your IRA assets in equal payments over your life expectancy
- distribution on account of an IRS Levy
Am I ever required to take funds from my Traditional IRA?
Beginning in the year that a Traditional IRA holder turns age 70½, distributions from an IRA must begin. These distributions are generally based on the person's IRA balance divided by his or her life expectancy, either singly or jointly with their IRA beneficiary. Since the purpose of IRAs is to provide for retirement - not to be a tax shelter - IRA holders failing to take their required distributions are subject to a substantial penalty.
For more information about the wisdom and ease of opening an IRA, ask one of our representatives for more details today.
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