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Your Traditional IRA Advantage

A Traditional IRA is easy to maintain, and it may offer you two important tax advantages:


#1 Deductible Contributions

      You may be allowed to deduct your total annual Traditional IRA contributions on your federal income tax return.

 

 #2 Tax-Deferred Earnings

    Every penny of the earnings in your Traditional IRA is 100% free from federal income tax until you withdraw it from your account. And, tax-deferred money grows quicker! This is why your money will grow faster in a Traditional IRA than it would if you save that same amount each year without the benefit of tax deferral.

 

Increased IRA Contribution Limits

Starting in 2002, the annual Traditional IRA contribution limits will be raised. Individuals age 50 and older will benefit from even higher limits, allowing those closest to retirement to save even more.

The chart below shows the new IRA contribution limits for the next several years.

 

  Traditional IRA Under Age 50 Traditional IRA Age 50-70½
2008 $5,000 $6,000
2009 $5,000 $6,000
2010 $5,000 $6,000
2011 $5,000 $6,000
2012 $5,000 $6,000

 

The contribution limit for Traditional and Roth IRAs is aggregated. For example, for 2012, if you are age 50 or older, you may contribute $6,000 to a Traditional IRA or a Roth IRA, but if you contribute to both, the total contribution to both will be limited to $6,000.

Your Traditional IRA contributions are limited to 100% of your earned income. To make a regular contribution of $6,000 for 2012, you must earn at least $6,000 in 2012.

Spousal Contributions

If you are under 70½, married, and file a joint federal income tax return with your spouse, who has more earned income than you do, you may make a "spousal contribution" to your Traditional IRA. For example, for 2012, if you are both age 50 or over, if your spouse earns over $12,000, you may contribute up to $6,000 to your Traditional IRA, even if your spouse contributes a full $6,000 to his or her own Traditional IRA.

Contributions Are Flexible

Opening a Traditional IRA doesn’t mean you have to make a contribution every year. The restriction is that you may not contribute more than the annual IRA contribution limit or 100% of your earned income for the year, whichever is less.

Contributions for a tax year may be made during the tax year, up to your tax-filing deadline for that tax year (not including extensions).

Tax Credits for IRA Contributions

Starting in 2002, you may be eligible for a tax credit for Traditional IRA contributions. Depending on your tax-filing status and income, the credit will vary from 10% to 50% of the amount contributed, up to $2,000, for a maximum tax credit of $1,000.

Deducting Your Traditional IRA Contributions

Your Traditional IRA contribution is fully deductible if you (you and your spouse, if married) are not an active participant(s) in a retirement plan at work, regardless of income level.

If you are married, filing jointly, and are not an active participant in a retirement plan at work, but your spouse is, determine your combined modified adjusted gross income (MAGI) and refer to the following chart:

 

Tax Filing Status Full Deduction if MAGI is at or below: Limited Deduction if MAGI is more than/but less than: No Deduction if MAGI is at or above:
     Married filing jointly $173,000 $173,000/$183,000 $183,000

 

However, if you are an active participant in a retirement plan at work (regardless of whether your spouse is, if married) determine your combined MAGI and refer to the following chart:

 

Tax Filing Status Year Full Deduction if MAGI is at or below: Limited Deduction if MAGI is more than/but less than: No Deduction if MAGI is at or above:
Single 2007 $52,000 $52,000/$62,000 $62,000
2008 $53,000 $53,000/$63,000 $63,000
2009 $55,000 $55,000/$65,000 $65,000
2010 $56,000 $56,000/$66,000 $66,000
2011 $56,000 $56,000/$66,000 $66,000
2012 $58,000 $58,000/$68,000 $68,000
Married, filing jointly 2007 $83,000 $83,000/$103,000 $103,000
2008 $85,000 $85,000/$105,000 $105,000
2009 $89,000 $89,000/$109,000 $109,000
2010 $89,000 $89,000/$109,000 $109,000
2011 $90,000 $90,000/$110,000 $110,000
2012 $92,000 $92,000/$112,000 $112,000
Married, filing separately Any $0 $0/$10,000 $10,000

 



Withdrawing Money from Your Traditional IRA

You may withdraw money from your Traditional IRA at any time, and the taxable portion of that withdrawal will be taxed as ordinary income. Distributions you receive before you reach age 59½ may be subject to an IRS 10% penalty. However, the IRS 10% penalty does not apply to distributions that are:

 

  • Paid while you are disabled,
  • Paid in substantially equal periodic payments,
  • Paid to your beneficiary after your death,
  • Paid for deductible medical expenses,
  • Used for health insurance by unemployed individuals,
  • Used for a qualifying first-home purchase,
  • Used for qualifying higher education expenses,
  • Converted to a Roth IRA, or
  • Levied by the IRS.

 

Then, after you attain age 59½ and withdraw money, the taxable portion of that withdrawal will be taxed as ordinary income — but not subject to the IRS 10% early withdrawal penalty.

Save for Retirement with a Traditional IRA

It’s true. A Traditional IRA is a better way than ever to save for retirement. It offers individuals under age 70½ the opportunity to save each and every year. And, all Traditional IRA owners get the great benefit of tax-deferred earnings, which makes their money grow faster.

The chart below shows just how much more the new increased contribution limits allow you to save for your retirement with a Traditional IRA.

30 Year IRA Chart