Traditional IRA
Allows you to defer taxes on your earnings until they are withdrawn. Also, certain contributions are tax-deductible in the year they are made.
Eligibility
If you are under age 70 1/2 for the entire tax year and have earned income, you are eligible to establish a traditional IRA.
Contribution
The Economic Growth and Tax Relief Reconciliation Act of 2001 has increased contribution limits to the following levels:
| 2002 - 2004 | $3,000 |
| 2005 - 2007 | $4,000 |
| 2008 and thereafter | $5,000 |
Tax deductible
Based on whether you are an active participant in an employer-maintained retirement plan. You may be eligible for the maximum deduction, a partial deduction, or no deduction.
Taxable earnings
Tax deferred until withdrawal.
Withdrawal without penalty
You can withdraw funds from your traditional IRA without incurring a 10% IRA premature-distribution penalty after you reach age 59 1/2. You can avoid the penalty before age 59 1/2:
- If you become disabled
- If the distributions are part of substantially equal periodic payments
- For medical expenses in excess of 7.5% of your Adjusted Gross Income (AGI)
- For health care insurance if you've been receiving unemployment compensation for at least 12 weeks.
- Qualified higher education expenses
- For a first-time home purchase
Distribution
If over age 591/2, simply include the taxable portion of the amount withdrawn as income. If under 59 1/2 and do not meet one of the exceptions, you must also pay a 10% IRS penalty for premature distribution.
Required Distributions
At age 70 1/2, you must begin to take minimum required withdrawals or severe penalties will be imposed.
