What is a Traditional IRA?
A traditional IRA is an IRA that is not either a SIMPLE IRA or Roth IRA. They have two main advantages for investment and those are 1.) You can deduct some and sometimes all contributions to it, which just depends on your circumstances. 2.) Amounts, including earnings and gains, in a traditional IRA are not taxed until distributed (withdrawn). There are some exceptions, however.
[message type=”info”]Using the instructions on your income tax return or Form 8888 you can have your tax refund or portion of it directly deposited as a contribution to any IRA, whether it be a Roth IRA, SEP IRA, or Traditional IRA![/message]
Traditional IRA’s can be utilized to create a good bit of wealth that can take care of you once you’ve reached the age of 70 1/2 or your family after you’ve passed. Anyone who is less than 70 1/2 years of age by the end of the year and has received qualified taxable compensation during that year can open and contribute to a traditional IRA.
Kinds of Traditional IRA’s
There are 5 kinds of traditional IRAs. They are:
- Individual Retirement Account
Set up at a financial institution like a bank, mutual fund, or broker and can invest contributions as stocks, bonds, money market, or CD’s.
- Individual Retirement Annuity
Set up with a life insurance company through purchasing a special annuity an endowment contract.
- Employer and Employee Association Trust Account
Set for employees or labor union members to make IRA’s available to them through their union or employer.
- Simplified Employee Pension (SEP)
These are written arrangements that allow an employer to make deductible contributions to a traditional IRA, deemed a SEP IRA, set up on your behalf to receive these contributions.
- Individual Retirement Bonds
The sale of these bonds where suspended after April 30th 1982.
Contributing to a Traditional IRA
Even though a traditional IRA can be opened at anytime during the year, contributions may only be made via a chosen sponsor. Any contributions being contributed to a traditional IRA must be money, meaning that its has to be a check, money order, or cash. Property cannot be made as a contribution, but a they can invest in certain property. Now with that being said, there are some other exceptions when talking about rolling-over retirement accounts. They will not be covered here but I plan to cover them in a later post.
[message type=”warning”]Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA.[/message]
How much can I contribute?
Contributions to your traditional IRA can be as much as $5000 ($6000 if you are over age 50). There is only one requirement to be able to make the contributions. You and/or your spouse must have had taxable compensation at least equal to the amount of the contribution made to the traditional IRA. If both you and your spouse have separate IRAs you may be able to contribute up to as much as $10,000 if you are both under age 50, $11,000 if one of you is over age 50, and $12000 if you both are over age 50.
[message type=”info”]Amounts allowable to be contributed to a traditional IRA are reduced by any contributions to a section 501(c)(18) plan. Most of the time this need only apply to pension plans created before June 25th 1959 that are funded entirely by employee contributions.[/message]