Saving and investing in a Traditional IRA may be an effective way to reduce current income tax obligations. Traditional IRAs offer tax-deferred growth of your account while allowing you deduct all or part of your contributions from your taxable income.
A Traditional IRA may benefit you because:
- Some or all of your annual contributions may be tax-deductible, reducing your taxable income.
- The deductible contributions in your account will only be taxed at the time of withdrawal – a time when many investors are in a lower tax bracket.
- There are no income limits for contributing to a Traditional IRA, although all contributions might not be deductible.
Key Features of Traditional IRAs
- Tax-deferred growth potential.
- You generally pay taxes when you make withdrawals, at which time you may be in a lower tax bracket.
- Your contributions may be tax-deductible if you or your spouse does not participate in an employer-sponsored plan.
- Age: You must be under age 70½ and have earned income.
- Maximum Income: No Restrictions
- Minimum Income: You must have earned income equal to or greater than your contributions.
- Maximum Contributions: Click here to determine this year’s maximum contribution amount (PDF).
- Taxable: All withdrawals from a Traditional IRA (except for amounts attributable to nondeductible contributions) are generally taxed as ordinary income.
- Required Minimum Distributions: You must begin taking required minimum distributions by April 1 of the year following the year in which you reach age 70½.
- A 10% early withdrawal penalty may be due the IRS for distributions taken prior to attaining Age 59½.
Are my Traditional IRA Contributions Tax-Deductible?
You are eligible for a fully deductible IRA contribution if neither you nor your spouse participates in an employer-sponsored retirement plan. Your ability to deduct your full IRA contribution may be limited by your income if either of you do participate in a plan. Check the chart below to see if any part of your Traditional IRA contribution will be deductible at your income level.
What are the exceptions to the 10% Early Withdrawal Penalty?
The 10% penalty tax for withdrawals made before age 59½ is waived in the following cases:
- First-time home purchase up to $10,000
- Qualified medical expenses
- Qualified higher education expenses
- Health insurance premiums while unemployed (for at least 12 weeks)
- A series of Substantially Equal Periodic Payments
- Conversion of a Traditional IRA to a Roth IRA
- Qualified reservist distribution
- Creditor access/IRS levy in a civil suit