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Traditional IRA

A Traditional IRA is an account set up to save for retirement that offers special tax advantages.  These include tax deductions on contributions if eligible, tax-deferred earnings, and additional tax credit for qualifying individuals. 

Who can contribute to a Traditional IRA?
An individual can contribute to a Traditional IRA if they have not reached the age of 70 ½ and have earned income.  Earned income is described as compensation from personal services rendered including salary, fees, bonuses, and commissions for personal services.  An account owner’s spouse can also contribute if they have not reached the age of 70 1/2, the married couple has earned income, and they file a joint federal tax return.  In 2016 and 2017, the maximum annual contribution to an Individual Retirement Plan is $5500 dollars and a maximum catch-up of $1000 dollars if the IRA owner attains the age of 50 or older before the end of the taxable year. 

Tax deductions Contributions:
Whether or not an individual can take a tax deduction on their contribution to a Traditional IRA depends on three factors: active participation in an employer-sponsored retirement plan, marital status, and modified adjusted gross income (MAGI).  If an individual or their spouse participates in an employer-sponsored retirement plan, the deductibility of their contributions depends on MAGI.  If an individual or spouse does not participate in an employer-sponsored retirement plan then contributions made to their retirement account are tax deductible.  

What types of contributions can individuals make to a Traditional IRA?
An individual may make regular, spousal, catch-up, rollover, transfer, recharacterization, and simplified employee pension plan contributions.   An IRA holder must make a contribution by the due date of their federal income tax returns, not including extensions, for that tax year, usually April 15. 

IRA beneficiaries
An individual can elect two different kinds of beneficiaries, primary beneficiaries and contingent beneficiaries.  Primary beneficiaries are individual or entities intended to receive the IRA assets upon the death of the IRA owner.  Contingent beneficiaries are individuals or entities intended to replace the primary beneficiaries, but only if all the primary beneficiaries die before the IRA owner.  If multiple beneficiaries are named, each beneficiary will receive an equal share unless otherwise designated to financial organization.  IRA owners may elect to change beneficiaries at anytime.

When can individuals take deductions from their Traditional IRA?
An IRA owner may begin to take distributions from their IRA when they reach the age 59 ½.  Distributions from a traditional IRA are taxable in the year the distribution is made.  Any distributions taken before the age of 59 ½ are subject to a 10% early distribution penalty with some exceptions.  These include death, disability, medical expenses exceeding 7.5 % of adjusted gross income, heatlh insurance premiums following unemployment, first-time homebuyer expense, higher education expense, IRS levy, substantially equal periodic payments, and qualified reservist distributions. Individuals must start taking required minimum distributions (RMD) from their IRA in the year they reach the age of 70 ½.  The RMD amount is based on the IRA balance and the IRA owner’s distribution period.