1) What is a Traditional IRA?
A Traditional IRA is a tax-deferred account in which contributions are made with pre-tax dollars. This allows the money contributed to the Traditional IRA to compound tax-free until funds are withdrawn. Earnings in a Traditional IRA are tax-deferred until withdrawn by the IRA owner or his/her beneficiary.
Anyone who is under the age of 70½ and has earned income is eligible to make a contribution to a Traditional IRA.
2) What is earned income?
Earned income is defined as the wages, salaries, commissions, bonus, compensation, alimony and any other amount that you receive for providing personal services. Passive income such as interest, dividends, pensions, and most rental income are not considered compensation for the purpose of funding an IRA.
3) What are the Traditional IRA Contribution Limits?
In 2013 and 2014, the contribution limit for Traditional IRAs is $5,500.
4) Can I make a catch-up contribution?
In 2013 and 2014, if you're age 50 or older you can contribute up $6,500.
5) How do I know if I'm eligible to contribute?
You can set up and make contributions to a Traditional IRA if you meet BOTH of these requirements:
- You (or, if you file a joint return, your spouse) received taxable compensation during the year
- You were not age 70½ by the end of the year
6) If I am covered by my employer's retirement plan, can I still contribute to an IRA?
You can have a Traditional IRA whether or not you are covered by any other retirement plan. If you're covered by a retirement plan at work, your deduction for contributions to a Traditional IRA is reduced (phased out) based on your modified adjusted gross income (AGI).
7) When can I start taking withdrawals from my IRA?
You can withdraw funds from a Traditional IRA without penalty at any time after you have attained the age of 59½.
8) When must I start taking withdrawals from my IRA?
You must start taking a Required Minimum Distribution (RMD) the calendar year you reach age 70 ½.
For IRA purposes, you reach 70½ on the date that's six calendar months after your 70th birthday. For example, if you were born on June 30, 1941, you would be age 70½ on December 30, 2011. If you were born on July 1, 1941, you would reach age 70½ on January 1, 2012.
9) Can I withdraw funds before I reach age 59 ½?
If you decide to withdraw money from your Traditional IRA account prior to the attainment of age 59½ you will be subject to the imposition of a 10% early distribution penalty tax.
The following are exceptions to the 10% early distribution penalty tax:
- You have unreimbursed medical expenses that are more that 7.5% of your adjusted gross income
- The distributions are not more than the cost of your medical insurance.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- You are receiving distributions in the form of an annuity.
- The distributions are not more than your qualified higher education expense.
- You use the distributions to buy, build, or rebuild a first home.
- The distribution is due to an IRS levy.
- You are in the military reserve and the distribution is a qualified reservist distribution.
10) Where can I learn more about Traditional IRA Rules?
Guidance regarding the rules and restrictions imposed upon IRAs can be found in IRS Publication 590