TRADITIONAL IRAS


What is a Traditional IRA and how does it work?

The most common IRA, a Traditional Individual Retirement Account, allows an individual to get a tax deduction for money that is set aside for retirement. The money put into an IRA and the investment earnings on those contributions are not taxed until they are withdrawn.

Who can set up a Traditional IRA?

To be eligible for a Traditional IRA, a person must have received earnings from work during the year and be under age 70 ½.
 
In addition, if an individual participates in a pension, 401(k) or other retirement plan offered by their employer, that person may not be able to contribute to a Traditional Deductible IRA if their income is above certain specified amounts.

For example, if you are covered by a pension, 401(k) or other employer-provided retirement plan, for 2009, you can only take a full tax deduction for your IRA contribution if your earnings for the year are less than $55,000 (or if you are married, if your joint earnings are under $89,000).  You can get a partial deduction if your income is less than $65,000 (less than $109,000 if you are married.)

For 2010, you can only take a full tax deduction for your IRA contribution if your earnings for the year are less than $56,000 (or if you are married, if your joint earnings are under $89,000).  You can get a partial deduction if your income is less than $66,000 (less than $109,000 if you are married.)

How much can you contribute to a Traditional IRA?

Generally speaking, for 2009 an individual can contribute up to $5,000 dollars ($6,000 for those age 50 or older), but that person cannot contribute more than their taxable compensation for that year. In 2010 the limit will remain the same.

For more information on this topic, please visit our list of retirement plan contribution limits.

Can a non-working husband or wife contribute to a Traditional IRA?

If an individual meets the requirements for a Traditional Deductible IRA, their non-working spouse can contribute to a Traditional IRA, as long as the combined contributions do not exceed their earnings or $10,000 if that is less (or $12,000 if they are both age 50 or over). 

When is the deadline for contributing to a Traditional IRA?

In general, deadlines for contributions to an IRA are in the middle of April for the previous tax year.  Contributions for 2009 must be made by April 15, 2010.

When can money be withdrawn from a Traditional IRA?

Funds can be withdrawn at any time, but there can be a 10 percent tax penalty for withdrawing the funds before age 59 ½.  Distributions must start by April 1 of the year following the year in which a person reaches age 70½. However, for the 2009 tax year, Congress has granted a temporary one-year waiver of required minimum distribution rules. Read this section of IRS Fact Sheet 590 for more information.

If you are not eligible to contribute to a Traditional IRA, you may be eligible to set up a Nondeductible IRA or a Roth IRA.

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