What Is a Traditional IRA?

Traditional IRA

The first time I ever thought about retirement planning, my financial adviser waxed almost poetic about a traditional IRA.

You are probably contributing to an traditional IRA account already, but if you aren’t, now might be a good time to review some traditional IRA facts.

If you have an IRA account, you can decide whether this account or a rollover to a Roth IRA would be the better option for you..

A traditional IRA is a simple savings plan and could be the foundation of your retirement income while you take advantage of tax benefits. I say this because with a traditional IRA you don’t incur tax on your earnings unless you decide to withdraw your money. Also, your traditional IRA contributions are tax-deductible.

What about traditional IRA eligibility criteria?

I find this is a big advantage. You can contribute to a traditional IRA if:

  • You are under 70-and-a-half years old
  • You are the spouse of a working individual and earn taxable income

Your income can be from employment or self-employment. Traditional IRA contribution limits vary from year to year and if you are, say, in your 20’s and planning to get started with an IRA account, you can save up to $5000 per year. If you are 50 or older, you are allowed an additional $1000 as a catch-up contribution – taking your savings up to $6000 per year. I think this can be a great retirement savings option. Particularly if you start investing early, it can grow to a substantial amount.

How do I benefit from a traditional IRA?

That is what I wanted to know, too, before I decided to start saving into an IRA account. The biggest benefit of a tax-deductible traditional IRA is that your contributions are from pre-tax dollars. You deduct your contribution from your present income and end up saving on taxes. However, I opted for a traditional IRA rollover to Roth, as it suited my personal situation better. And before you ask, let’s look at the  traditional IRA vs. Roth IRA.

Traditional IRA vs. Roth IRA

My question for you here is this – do you want to save tax now, or when you retire? If you want to save tax now,  choose a traditional IRA. If you would like to save taxes when you retire, it’s a Roth IRA for you. In fact, I opted for a Roth. Obviously, the earlier you start saving, the more money you’ll have when you retire. To open an IRA account, all you have to do is find out whether you are eligible, compare the traditional IRA vs. Roth IRA, choose the option that suits you and go ahead and open your account.

What are Roth IRA and traditional IRA contribution limits?

To make your IRA contributions for last year, you have until April 15 of this year.

If you are not married, your contributions are tax-deductible if you are not an active participant in an employer-sponsored retirement plan like a 401(k). If you are, you need to conform to certain income limits to qualify for tax-deductible contributions. When we say income, we are talking about Adjusted Gross Income, also called AGI.  The deductible amount of a traditional IRA contribution tapers to zero after a certain AGI level.  Here’s the info for 2009:

  • For a single active participant, the full deduction limit is $55,000 and the phase-out amount is $65,000
  • If you are married and filing jointly, the full deduction limit is $89,000 and the phase-out amount is $109,000
  • If you are married and file separately, your full deduction limit is $0 and the phase-out amount is $10,000 in all years

If you have taxable income, you can contribute to a Roth IRA no matter how old you are, as long as your AGI is within the specified limits. If you file singly, your contribution to a Roth IRA can be made in full if your AGI did not exceed $105,000 in 2009 or 2010. A partial contribution is also allowed to a Roth IRA if your AGI is between $105,000 and $120,000 for 2009 or 2010. The moment your AGI reaches $120,000, you stop being eligible.

For a married couple who file jointly, the phase-out range for a Roth IRA contribution is $166,000 to $176,000 in 2009, and $167,000 to $177,000 in 2010. For a married person filing separately, the phase-out range is $0 to $10,000.

Obviously, understanding the complexity of Roth and traditional IRA contribution limits is not easy.

You will need to talk to a qualified IRA specialist who can help you.

Like me, make sure you get the savings plan that gives you the maximum benefit.



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