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What You Need to Know About the Traditional IRA
Who is eligible to make Traditional IRA contributions?
Anyone who has earned income and has not reached age 70½ by the end of the year.
How much can I contribute?
Up to $5,500 a year ($6,500 if age 50 or older), or 100% of your earned income, whichever
is less. Earned income is earnings from employment (including
self-employment or alimony), but not investment or rental income.
Can my spouse also contribute?
Whether or not your spouse has earned income, you can open separate IRAs and contribute up to $5,500 each ($6,500 if age 50 or older), for a total of $11,000 ($13,000 if both spouses are age 50 or older) each year – as long as your combined earned income is at least $11,000 ($13,000 if both spouses are over 50 and want to contribute the maximum amount) and your spouse is under age 70½.
Can I take a tax deduction for my contributions?
Although anyone with earned income can contribute to a Traditional
IRA, whether you can take a tax deduction depends on how much
income you have, and whether you participate in a retirement plan
at work.
- If neither you nor your spouse participates in an employer’s retirement
plan, your contributions are fully deductible, regardless of your
income.
- Even if you do participate in an employer’s plan, you can take
a full or partial deduction if your income does not exceed certain
levels.
Use the Guide to Traditional IRA Deductions to check your IRA deductibility.
If I participate in a company retirement plan but my spouse does
not, are my spouse’s contributions fully tax-deductible?
Yes. In 2013, as long as your joint income is less than $178,000. If your
income is between $178,000 and $188,000, you can take a partial deduction. For couples with income over $188,000, you cannot take
a deduction if either spouse participates in an employer’s retirement plan.
When can I make contributions?
At any time during the tax year, or until April 15 of the following
year.
When can I withdraw money from my account?
You can take money out at any time, but withdrawals before age 59½
may be subject to a 10% penalty tax. The law requires that you begin
taking withdrawals no later than April 1 following the year you
reach age 70½.
How will my withdrawals be taxed?
If all of your contributions were deductible, your withdrawals
will be taxable as ordinary income. If you made any nondeductible contributions, they will come out tax-free, in which case each withdrawal from your account will be partly taxable and partly tax-free.
What if I take money out before age 59½?
Normally, a 10% penalty tax applies to any taxable amount you withdraw before age 59½. But, there are exceptions.
For example, the penalty will not apply if you:
- roll over your money to another retirement plan within 60 days;
- are permanently disabled;
- start a periodic payment plan based on your life expectancy;
- use up to $10,000 to buy a first home for yourself or certain
family members; or
- pay higher education expenses for yourself or certain family members.
Also, the penalty will not apply to amounts your beneficiaries receive after your death.
See IRS Publication 590 for additional information.
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