What You Need to Know About a Traditional IRA
Opening an Account
Financial institutions oversee and administer traditional IRAs on behalf of beneficiaries. These accounts bear interest over time and provide a way for taxpayers to save for retirement expenses while contributing to IRAs during working years. Consult with your local bank or investment firm to open this type of savings account.
Your total contributions to all forms of IRAs tops out at $5,500 per tax year. If you are 50 and older, you get to contribute $6,500 per year to your cumulative IRAs. When you reach age 70 1/2, you can no longer contribute to traditional accounts, but you may continue to add to Roth IRAs.
One of the tax advantages of opening a traditional IRA revolves around taking a tax deduction for the year in which you make contributions. If you already have a retirement plan through your employer, you must make $61,000 or less for a modified adjusted gross income, and file as single or head of household, to deduct your entire contribution for the year.
If you file as married with a joint return, or as a qualifying widower, your income must be less than $98,000 to deduct the entire contribution. If you are married, but file separately, you get a partial deduction if your modified adjusted gross income is $10,000 or more.
If you do not have a retirement plan at work, you may deduct the full amount of your IRA contribution when you claim you are single, head of household, married filing jointly or a qualified widower. The deduction reduces your tax liability for a given tax year, thereby lowering the amount of taxes you owe to the federal government.
You can request distributions at any time, but the IRS assesses a 10 percent tax on withdrawals made before age 59 1/2 unless you meet certain exceptions. You must start withdrawing money during the year you turn 70 1/2 or the IRS taxes the required minimum distribution at 50 percent.
Early Withdrawal Penalty Exceptions
You do not have to pay the early withdrawal penalty if you meet one of several criteria. You may use the distribution to pay certain unreimbursed medical expenses that amount to more than 10 percent of your adjusted gross income. Use the early withdrawal to pay for expenses related to a permanent disability. You may also pay for qualified higher education expenses, provide the expenses are less than the amount distributed. Purchase or build a first home with an early withdrawal.
A traditional IRA represents one way you can save for retirement while deferring taxes until you withdraw the money from the account. The Internal Revenue Service governs contribution limits, withdrawal penalties and time frames of traditional IRAs. Discover how these types of individual retirement accounts work.