From Wikipedia, the free encyclopedia Traditional IRA
Traditional IRA
Year Age 49 and Below Age 50 and Above
2005 $4,000 $4,500
2006–2007 $4,000 $5,000
2008–2010[1] $5,000 $6,000
2011 and beyond[1] Indexed to inflation (in $500 increments) Indexed to inflation (in $500 increments)
Established by the Tax Reform Act (TRA) of 1986, (Pub.L. percent marginal tax bracket, then a $1,000 benefit
99-514, 100 Stat. 2085), a Traditional IRA is an individual ($1,000 reduced tax liability) will be realized for the
retirement account (IRA) in the United States. The IRA year. Because qualified distributions are taxed as
is held at a custodian institution such as a bank or bro- ordinary income (the taxpayer’s highest rate), the
kerage, and may be invested in anything that the custo- long-term benefits of the traditional IRA are only
dian allows (for instance, a bank may allow certificates comparable to those of a Roth IRA (whose qualified
of deposit, and a brokerage may allow stocks and mutual distributions are tax free) if the current year tax
funds). Unlike the Roth IRA, the only criterion for being benefit ($1,000 above) is reinvested, or if the pre-tax
eligible to contribute to a Traditional IRA is sufficient in- amount going into both is the same.
come to make the contribution. However, the best provi- • Also, if a taxpayer expects to be in a lower tax
sion of a Traditional IRA — the tax-deductibility of con- bracket in retirement than during the working years,
tributions — has strict eligibility requirements based on then a traditional IRA offers an increased incentive
income, filing status, and availability of other retirement over the Roth IRA.
plans (mandated by the Internal Revenue Service). • Another advantage of a Traditional IRA is that the
Transactions in the account, including interest, divi- taxpayer gets the tax benefit immediately.
dends, and capital gains, are not subject to tax while • With the Roth IRA, there may be a risk that over the
still in the account, but upon withdrawal from the ac- next several decades Congress will decide to tax Roth
count, withdrawals are subject to federal income tax (see IRA distributions; or that a national Value Added Tax
below for details). This is in contrast to a Roth IRA, in will be imposed on purchases. Either alternative
which contributions are never tax-deductible, but qual- would subject the Roth beneficiary to effective
ified withdrawals are tax free. The traditional IRA also double Federal taxation, once at the time of the
has more restrictions on withdrawals than a Roth IRA. deposit, once at the time of withdrawal.
With both types of IRA, transactions inside the account
(including capital gains, dividends, and interest) incur no
tax liability.
Disadvantages
According to IRS pension/retirement department as • One must meet the eligibility requirements to
of July 13 2009, Traditional IRAs (originally called Regular qualify for tax benefits. If one is eligible for a
IRAs) were created in 1975 and made available for tax re- retirement plan at work, one’s income must be
porting that year as well. Information pertaining to them below a specific threshold for your filing status.
from 1980 through the present is available at the IRS.gov • All withdrawals from a Traditional IRA are included
website. by reviewing the instructions for the form 1040. in gross income and subject to federal income tax
The original contribution amount in 1975 was limited to (with the exception of any nondeductible
$1,500 or 15% of the wages/salaries/tips reported on line contributions; there is a formula for determining
8 of the Federal form 1040 (1975). how much of a withdrawal is not subject to tax). If
Traditional IRA contributions are limited as follows: one’s investment style is buy-and-hold or dividend-
seeking, then a Traditional IRA is at a disadvantage
since holding stocks in an IRA means they lose their
Advantages favorable tax treatment given to dividends and
• The main advantage of a Traditional IRA, compared capital gains.
to a Roth IRA, is that contributions are often tax- • If one has a lot of disposable income, a Roth IRA in
deductible. For instance, if a taxpayer contributes effect shelters more assets from taxes on gains than
$4,000 to a traditional IRA and is in the twenty-five a Traditional IRA does, because the contribution
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From Wikipedia, the free encyclopedia Traditional IRA
Year Married Fil- Married Filing Jointly (and you were Single, Head of Household or Married Filing Separately
ing Jointly not covered by an employee-spon- Married Filing Separately (and you lived with your
or Qualified sored retirement plan but your (and you did not live with spouse at any time during
Widow spouse was) your spouse) the year)
2007 $83,000 and $156,000 and $166,000 $52,000 and $62,000 $0 and $10,000
$103,000
2008 $85,000 and $159,000 and $169,000 $53,000 and $63,000 $0 and $10,000
$105,000
2009 $89,000 and $166,000 and $176,000 $55,000 and $65,000 $0 and $10,000
$109,000
2010 $89,000 and $167,000 and $177,000 $56,000 and $66,000 $0 and $10,000
$109,000
2011 $90,000 and $169,000 and $179,000 $56,000 and $66,000 $0 and $10,000
$110,000
limits are the same, but the Traditional IRA is pre- sometimes referred to as either "deductible" or "non-de-
tax, so it is equivalent to a lesser amount of Roth IRA ductible."
money post-tax. Suppose someone in the 25% tax If a taxpayer’s household is covered by one or more
bracket has $5333 pre-tax income to invest. He can employer-sponsored retirement plans, then the de-
invest all of this post-tax (which is $4000) to a Roth ductibility of traditional IRA contributions are phased
IRA. But he can only invest a portion of it ($4000 pre- out as specified income levels are reached (Modified Ad-
tax) to a Traditional IRA. In the future, again justed Gross Income is between).
assuming 25% taxes, this will be equivalent to an The lower number represents the point at which the tax-
initial post-tax investment of $3000. One would have payer is still allowed to deduct the entire maximum year-
to invest the remainder of the money that could not ly contribution. The upper number is the point as of
be contributed to the Traditional IRA to try to make which the taxpayer is no longer allowed to deduct at
up some of this difference; however, such an all. The deduction is reduced proportionally for taxpay-
investment would not be tax-sheltered, so does not ers in the range. Note that people who are married and
grow as fast as a tax-sheltered investment. lived together, but who file separately, are only allowed
• Perhaps the greatest disadvantage of the Traditional to deduct a relatively small amount.
IRA is its forced distributions based on age. To be eligible, you must meet the earned income min-
Withdrawals must begin by age 70½ (more precisely, imum requirement. In order to make a contribution, you
by April 1 of the calendar year after age 70½ is must have taxable compensation (not taxable income
reached) according to a complicated formula. If an from investments). If you make only $2000 in taxable
investor fails to make the required withdrawal, half compensation, your maximum IRA contribution is $2000.
of the mandatory amount will be confiscated
automatically by the IRS. The Roth is completely free
of these mandates.
Converting a Traditional IRA to
• In addition to the distribution being included as a Roth IRA
taxable income, the IRS will also assess a 10% early
Conversion of a Traditional IRA to a Roth IRA results in
distribution penalty if the participant is under age
the converted funds becoming taxed in the year they are
59½. The IRS will waive this penalty with some
converted (with the exception of non-deductible assets).
exceptions, including first time home purchase (up
Prior to 2010, two circumstances prohibit a conver-
to $10,000), higher education expenses, death,
sion to a Roth IRA: Modified Adjusted Gross Income ex-
disability, unreimbursed medical expenses, health
ceeding $100,000 or the participant’s tax filing status is
insurance, annuity payments and payments of IRS
Married Filing Separately. With recent legislation, as part
levies, all of which must meet certain stipulations.
of the Tax Increase Prevention and Reconciliation Act of
2005 (TIPRA), the modified AGI requirement of $100,000
Income limits and not be married filing separately criteria was removed
All United States taxpayers can make IRA deposits and in 2010.
defer the taxation of earnings. However, as explained be-
low, the deposits are not deductible from income under
certain circumstances. Accordingly, traditional IRAs are
2
From Wikipedia, the free encyclopedia Traditional IRA
Transfers vs. Rollovers as a way to temporarily take funds from an IRA. A partic-
ipant will take a distribution and, in turn, all or some of
Transfers and rollovers are two ways of moving IRA shel- the distribution that the participant takes may be rolled
tered assets between financial institutions. back into the same IRA plan within the allowed period to
A transfer is normally initiated by the institution re- retain its tax deferred status. One 60 day rollover is al-
ceiving the funds. A request is sent to the disbursing in- lowed every rolling 12 months, per IRA[2]. For instance, if
stitution for a transfer and a check (made payable to the you withdraw any amount from IRA-1 and deposit it into
other institution) is sent in return. This transaction is not IRA-2 (as a tax-free rollover), you cannot make another
reported to the IRS tax-free rollover of any funds from IRA-1 or IRA-2 for 365
A rollover (sometimes referred to as a 60 day days. However, this would not prevent you from making
rollover) can also be used to move IRA money between a tax-free rollover from another IRA.
institutions. A distribution is made from the institution
disbursing the funds. A check would be made payable
directly to the participant. The participant would then
See also
have to make a rollover contribution to the receiving fi- • 401(k) IRA matrix
nancial institution within 60 days in order for the funds
to retain their IRA status. This type of transaction can on-
ly be done once every 12 months with the same funds.
External links
Contrary to a transfer, a rollover is reported to the IRS. • Individual Retirement Accounts at the Open
The participant who received the distribution will have Directory Project
that distribution reported to the IRS. Once the distribu- • IRA Publication 590 (IRAs) (pdf)
tion is rolled into an IRA, the participant will be sent a • IRS Traditional IRA publication 590 (html)
Form 5498 to report on their taxes to nullify any tax con- • Which IRA Is Right for You: Roth or Traditional?
sequence of the initial distribution.
"Borrowing Money" from an IRA
Notes and references
[1] ^ IRA Contribution Limits Traditional IRA Phase-
A loan from an IRA is prohibited. It is considered a pro-
out Range and Limits ...
hibited transaction and the IRS may disqualify your plan
[2] IRA Rollover Policy in IRS Publication 590 (2009)
and tax you on the assets. Some use the 60 day rollover
Retrieved from "http://en.wikipedia.org/w/index.php?title=Traditional_IRA&oldid=474653227"
Categories:
• Tax-advantaged savings plans
• Individual Retirement Accounts
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