Traditional IRA

A traditional IRA allows individuals to make tax-deductible contributions of 100% of their earned income, up to the maximum contribution limits allowed, in any given year. You and/or your spouse's contributions are fully tax-deductible if neither of you is covered by a pension plan at work. If one spouse does not have a pension plan at work, then that particular spouse is eligible for an IRA. If either or both spouses participate in a retirement plan at work, you may still be eligible for tax-deductible IRA contributions based on your adjusted gross income (AGI).

For 2015, refer to the following chart to determine if your IRA contributions will be deductible based on your adjusted gross income level and filing status (if under age 50):

 

Current Deductions based on Adjusted Gross Income
Single Married Filing Jointly Deduction
AGI less than $61,000 AGI less than $98,000 Full
AGI $61,000 to $71,000 AGI $98,000 to $118,000 Limited
AGI more than $71,000 AGI more than $118,000 None
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Normal Withdrawals
Anytime after age 59½, you may make withdrawals from your IRA without incurring IRS penalties. Any amounts withdrawn from your traditional IRA are completely taxable as ordinary income. At age 70½, you must begin receiving minimum distributions from your IRA based on your life expectancy.

Early Withdrawals
Your money may be withdrawn from an IRA at any time; however, when a withdrawal is made, all monies are considered ordinary income and subject to taxation. Early withdrawals, those made prior to age 59½, will be assessed a 10 percent early withdrawal penalty by the IRS with the exception of the following:

  • Payments made to a beneficiary
  • Monies withdrawn while you are disabled
  • Payments made to you in equal, periodic payments by fixed annuitization
  • Withdrawals for deductible medical expenses
  • Money used to pay health insurance premiums (for certain unemployed individuals)
  • Withdrawals made for qualified first-time home purchases
  • Withdrawals made for qualified higher education expenses

Payments to Beneficiaries
Any monies paid to a beneficiary may be received by one of two methods. The first method, referred to as the Five-Year Rule, means all monies will be distributed within the next five years and then the account will be closed. The second method, the Life Expectancy Option, allows a beneficiary to receive the money over the course of his or her lifetime or in any shorter period of time.

A surviving spouse is eligible for special consideration as a beneficiary, such as the right to roll-over the decedent’s IRA into an IRA in their name.

Rollovers and Transfers
Rollovers and transfers are methods of moving your retirement assets from one place to another. Rollovers pass through the IRA participant’s hands, while transfers move the funds from financial institution to financial institution. The IRS has some general rules to follow concerning transfers and rollovers. Only one rollover is allowed in any 12-month period. Rollovers must be deposited to an IRA account within 60 days for the account to maintain its tax-deferred status. Transfers have no such limits or time constraints.

 

Current IRA Contribution Limits
Tax year Under Age 50 Age 50+
2014 $5,500 $6,500
2015 $5,500 $6,500

 

For additional information on IRAs consult IRS publication 575 - Pensions and Annuity Income. Remember, tax laws change and your personal situation is unique; therefore, you are advised to always seek appropriate advice from your attorney or tax advisor before pursuing any investment.

DISCLAIMER:
SNPJ does not assume responsibility for the accuracy of this information.  Everyone's information is different, so you should consult with your tax or legal advisor for your specific situation.