A traditional IRA (individual retirement account) is a critical retirement planning opportunity. Tax-deferred growth and a potential tax deduction are among its most important features. Traditional IRA considerations include:
Why Open an IRA
A traditional IRA is particularly attractive to those who are not eligible for a workplace retirement plan (like a 401(k)) or whose earnings limit their ability to contribute to a Roth IRA. With opportunities for tax-deferred growth limited, a traditional IRA can be a great way to increase the likelihood that your retirement years are prosperous ones.
How and Where to Open an IRA
You can open an IRA with Tennessee Capitol, LLC or at nearly any bank or brokerage house, either in-person or online. Opening an IRA is a very simple process, typically with help readily available. Often, there are just a few forms for you to complete. Bring your Social Security number with you as well as the Social Security numbers and addresses of any potential beneficiaries of your account.
Earned Income
The amount you are permitted to contribute to an IRA is limited to your earned income. Earned income includes wages and self-employment earnings, but does not include interest or dividends. If you are married, your combined contribution limit is restricted to the total of your combined earned income.
Contribution Limits
For the year 2008, the most you can contribute to an IRA is $5,000. If you are 50 or over, you may contribute a total of $6,000.
Contribution Deadline
Each IRA contribution relates to a specific calendar year. You can make a contribution from January 1 of that year until the filing deadline of your tax return. Those who wish to make a 2008 IRA contribution can do so from January 1, 2008 until April 15, 2009. You don’t have to make the entire $5,000 contribution at once; you can make many smaller contributions, as long as the total contributed does not exceed $5,000.
Tax Deduction
Many individuals receive a tax deduction for their traditional IRA contributions. Unfortunately, not everyone qualifies for the deduction. If you are eligible to participate in a workplace retirement plan (such as a 401(k) plan) and your income exceeds certain levels, you may not deduct your IRA contribution. This is true even if you do not actually participate in your company’s 401(k) plan.
For those who do qualify for an IRA deduction, this write-off is an “above-the-line” deduction, which means that you do not have to itemize in order to save on your taxes.
Tax-Deferred Growth
Regardless of whether you receive a tax deduction for your contribution, every traditional IRA grows tax-deferred. You do not have to pay any taxes on the earnings in the account. In fact, you do not even report the income to the IRS. It is not until you take your money out of the IRA, ideally during retirement, that you owe taxes.
No Income Limitations
Unlike Roth IRA contributions, eligibility to contribute to a traditional IRA is not restricted by any maximum level of income.
Required Distributions
Starting with the year after you reach 70 1/2, you must begin to take money out of your traditional IRA. The required minimum distribution amount is determined by the Internal Revenue Service and is based on your life expectancy.
