Traditional IRA

What is a Traditional IRA and What are its Benefits?

Traditional IRAs offer a tax-advantaged approach to accumulating funds for retirement.
Benefits include:

Contributions may be tax-deductible, depending on your adjusted gross income (AGI) and whether you participate in a retirement plan at work.

Your potential earnings from your investments can grow on a tax-deferred basis. If your investments increase in value, you won't pay taxes on those earnings until you withdraw them - typically at retirement. Tax-deferred compounding can enhance the growth potential of your money.

The chart below shows annual contribution limits.
For a Traditional IRA, you may contribute up to the lesser of: the current year's age-based limit or 100% of earned income. Please note that the dollar limit of your contribution is reduced by any contributions you make to a Roth IRA for the same tax year.

Are Traditional IRA Contributions Deductible?

For 2007, if you are covered by a retirement plan at work, your deduction for contributions to a Traditional IRA is reduced (phased out) if your modified Adjusted Gross Income (AGI) is:
More than $83,000 but less than $103,000 for a married couple filing a joint return or a qualifying widow/widower
More than $52,000 but less than $62,000 for a single individual or head of household
Less than $10,000 for a married individual filing a separate return.
For 2007, if you are not covered by a retirement plan at work, your deduction for contributions to a traditional IRA may be reduced (phased out) if you either live with your spouse at any time during 2007 or file a joint return for 2007.

If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work (but you are not), your deduction is phased out if your AGI is more than $156,000 but less than $166,000.

If your AGI is $166,000 or more, you cannot take a deduction for contributions to a traditional IRA.

Source: Internal Revenue Service (IRS)

Early Withdrawal Exceptions

In most cases, a withdrawal from a traditional IRA before age 59 is subject to a 10 percent IRS penalty in addition to ordinary income taxes. However, there are exceptions. These include:
To pay for the purchase of a first-time home ($10,000 lifetime cap) To cover expenses for higher education Medical expense payments Health insurance expenses (if account owner is unemployed) Permanent disability of account owner Death of account owner