A Traditional IRA is one where the earnings generated
by investments within the IRA grow on a tax-deferred basis. Taxes are due
on earnings only as dollars are withdrawn from the IRA. There are two types
of Traditional IRAs:
Deductible IRA
If certain requirements are met, contributions to a Traditional IRA can
be deducted from current taxes. The following requirements must be met:
- The individual must not be eligible to participate in a workplace retirement plan; or
- If the individual is covered by a workplace retirement plan, income levels must not exceed specific limits.
The applicable income limits to qualify for a tax-deductible IRA are as follows in 2002:
| Single Filers |
| Full contribution deductible if income does not exceed: |
$34,000 |
| Partial deduction allowed for income levels up to: |
$44,000 |
If the income level exceeds $44,000 for an individual, no contributions are deductible.
| Married Filers (providing a joint tax return) |
| Full contribution deductible if income does not exceed: |
$54,000 |
| Partial deduction allowed for income levels up to: |
$64,000 |
If the income level exceeds $64,000 for an individual, no contributions are deductible.
The partial deduction is determined based on a percentage calculation. For instance, if a single filer earns $39,000, that is $5,000 above the limit for a fully deductible contribution. The entire phaseout amount is $10,000. Since $5,000 is half of the $10,000 phaseout, 50% of this individual's contributions can be deducted from current taxes.
Non-deductible IRA
Those who do not qualify for a deductible IRA or earn too much to make contributions to a Roth IRA can still participate in a Traditional IRA using contributions that are not tax deductible.
Earnings continue to grow on a tax-deferred basis, helping money build more quickly for retirement.
Important rules for Traditional IRAs
- Contributions for any tax year must be made by April 15 of the following
calendar year, or before you file your tax return, whichever comes first.
- Individual wage earners must be under age 70 1/2 to make contributions.
- Withdrawals are required after the IRA account holder reaches age
70 1/2.
- Contributions can be made for non-wage-earning spouses of up to $3,000
per year.
- Except to the extent IRA distributions are treated as a return of
non-deductible (after-tax) contributions, IRA distributions are subject
to tax at ordinary income tax rates. Records of non-deductible contributions
must be kept by the taxpayer.
- Distributions prior to age 59 1/2 are subject to an additional 10%
tax penalty.
Start on your path today
To take a step towards a comfortable retirement, please contact your Protective representative today.
