Traditional IRA

Recommended if you:

  • Want immediate tax benefits
  • Are not covered by another retirement plan and would like to deduct your IRA contribution
  • Are covered by another retirement plan, but would like to defer the tax on your earned interest until you retire
  • Are under 70 1/2 years and have earned income from employment

Important Facts

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  • A Traditional IRA is a long-term investment account that is FDIC insured.
  • For 2014, the maximum annual contribution is $5,500 per person.
  • If only one spouse works, each spouse can still open an IRA.
  • Can begin withdrawing IRA funds anytime after the age of 59 1/2 without early withdrawal penalties.
  • Early withdrawal penalties may apply.

Common Questions Regarding Traditional IRAs

Am I Eligible to Have a Traditional IRA?

If you are younger than age 70 1/2 for the entire tax year, and have compensation, you are eligible to establish a traditional IRA, even if you already participate in certain government plans, a tax-sheltered annuity, a Simplified Employee Pension (SEP) plan, a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), or a qualified pension or profit-sharing plan established by an employer.

What is Compensation?

Compensation is the salary or wages you receive as an employee. If you are self-employed, compensation is your net income for personal services performed for the business. All taxable alimony is considered compensation. Interest, dividends, and most rental income are passive income sources and are not considered compensation.

How Much Can I Contribute to My IRA?

You may contribute any amount up to 100 percent of your compensation or $5,500 for 2014, whichever is less, to a traditional IRA (or aggregated between a traditional and a Roth IRA).

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 increases the contribution limit as shown in the chart below.

To make up for lost retirement savings, EGTRRA also added "catch-up" contribution ability for individuals who have attained age 50 or older by the end of their taxable year. The chart below shows these additional amounts.

Regular Contribution Elegibility Requirements
Traditional IRA Roth IRA

Compensation

Younger than age 70 1/2 all year

Compensation

Limited by MAGI

Regular IRA Contributions
Tax Year Standard Combined IRA Contribution Limit Catch-Up Amount (Ages 50+) Total Combined IRA
2012 $5,000 (or 100% of compensation if smaller) $1,000 $6,000 (or 100% of compensation if smaller)
2013 $5,500 (or 100% of compensation if smaller) $1,000 $6,500 (or 100% of compensation if smaller)
2014 $5,500 (or 100% of compensation if smaller) $1,000 $6,500 (or 100% of compensation if smaller)
Contribution Deadline: Income tax return filing due date, not including extensions

Do I Pay Taxes on the Earnings of My IRA?

All earnings on your IRA contributions (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the account.

Do I Get a Tax Deduction for My Contribution?

Deductibility of your contribution is based on whether you or your spouse are an active participant in an employer-sponsored retirement plan. If you are an active participant, the deductible amount is dependent on your modified adjusted gross income (MAGI) and income tax-filing status. You may be elibible for the maximum deduction, a partial deduction, or no deduction. Your tax professional can help you determine your actual deduction.

Basic Rules for Determining IRA Deductibility

  • If you are single and are not an active participant in an employer-sponsored retirement plan, or are married and neither you nor your spouse are acive participants, you are eligible for a full deduction no matter how large your income.
  • If both you and your spouse are active participants or if you are single and an active participant, you may be eligible for either a full or partial deduction depending on you MAGI.
  • If you are not an active participant but your spouse is and you file a joint federal income tax return, you are eligible for a full deduction if your joint MAGI is less than $181,000. You qualify for a partial deduction if your joint MAGI is between $181,000 and $191,000.

The chart below demontrates the income limits for deductibility:

MAGI Phaseout Ranges
Tax Year Single, Active Participant (low end) Single, Active Participant (high end)
2012 $58,000 $68,000
2013 $59,000 $69,000
2014 $60,000 $70,000
Tax Year Married, Filing Jointly, Active Participant (low end) Married, Filing Jointly, Active Participant (high end)
2012 $92,000 $112,000
2013 $95,000 $115,000
2014 $96,000 $116,000
Tax Year Married, Filing Separately, Active Participant (low end) Married, Filing Separately, Active Participant (high end)
2012 $0 $10,000
2013 $0 $10,000
2014 $0 $10,000
Tax Year Married, Filing Jointly, Not an Active Participant, but Spouse Is (low end) Married, Filing Jointly, Not an Active Participant, but Spouse Is (high end)
2012 $173,000 $183,000
2013 $178,000 $188,000
2014 $181,000 $191,000

What if I'm Not Eligible for a Deductible IRA Contribution?

You can still make nondeductible contributions to your IRA. You may also be eligible for a Roth IRA.

How Are the Funds Taxed at Distribution?

You must include the taxable portion of the amount withdrawn (deductible contributions and all earnings) as income on your tax return. If you are younger than age 59 1/2, and do not meet one of the exceptions, you must also pay a 10 percent penalty tax for premature distribution. The portion of a distribution attributable to nondeductible contributions is not taxable when withdrawn, nor is it subject to the 10 percent premature-distribution penalty tax.

When Can I Withdraw Funds From My IRA Without Incurring Any Penalties?

You can withdraw funds from your IRA without a 10 percent premature-distribution penalty tax before age 59 1/2 if you become disabled, if the distributions are part of certain periodic payments, for medical expenses in excess of 7.5 percent of your adjusted gross income, for health insurance premiums if you have been receiving unemployment compensation for at least 12 weeks, for distributions paid directly to the IRS due to IRS levy, for qualified higher education expenses, or for a first-time home purchase. When you reach age 70 1/2, you must begin to take required minimum distributions or severe tax penalties will apply.

What happens to My IRA in the Event of My Death?

Your named beneficiary(ies) will receive the entire proceeds of the IRA. Your beneficiary(ies) will not be subject to the 10 percent premature-distribution penalty tax. Distributions to your beneficiary(ies) will be made in accordance with the required minimum distribution rules and your agreement.

What is a Spousal IRA?

The spousal IRA rules allow a married person to make an IRA contribution for his/her spouse. A married couple can contribute up to 100 percent of their combined compensation or $11,000 for 2014, whichever is less. The amounts can be divided in any manner between the two spouses' IRAs if no more than $5,500 is contributed to either IRA. These amounts will increase each year as shown earlier. Catch-up contributions are available for eligible spousal IRA arrangements and would increase the allowable contribution amounts.

How Do I Move Funds From One IRA to Another?

There are two methods you can use to move funds from one IRA to another: rollover and transfer. For a rollover, you have 60 calendar days following the date of receipt to roll over the distribution to another IRA. Rollovers from IRAs may not occur more than once during a 12-month period (this rule applies to each separate IRA you own). A transfer occurs when the funds are moved from one IRA to another IRA without you having control or custody of the funds. There are no time or frequency limits on the number of transfers permitted.

How Do I Move Funds From a Qualified Plan (QP), Tax-Sheltered Annuity (TSA), or IRC Section 457(b) Deferred Compensation Plan to a Traditional IRA?

An eligible QP, TSA, or 457(b) plan distribution may be rolled over or directly rolled over to an IRA. Generally, an eligible rollover distribution is any distribution except one that is (1) part of a series of substantially equal periodic payments over your single life expectancy or joint life expectancy of you and your beneficiary or for a specified period of ten years or more, (2) a required minimum distribution for an employee age 70 1/2 or older, or (3) any hardship distribution.

A rollover occurs when funds distributed from your QP, TSA, or 457(b) plan are paid directly to you, then subsequently rolled over by you to an IRA by the plan administrator/employer.

A direct rollover is a QP, TSA or 457(b) plan distribution that is made payable to an IRA by the plan administrator/employer.

QP, TSA, and 457(b) plan distributions paid to you are subject to a mandatory 20 percent federal income tax withholding at the time of distribution.

Funds moved to an IRA via a directy rollover are not subject to withholding.

As with an IRA-to-IRA rollover, a QP, TSA, or 457(b) plan recipient has 60 calendar days following the date of receipt to roll over any portion of the distribution to an IRA. The 12-month limitation does not apply to rollovers from a QP, TSA, or 457(b) plan to an IRA.

Is There a Contribution Deadline for Funding an IRA?

IRAs for a taxable year can be opened and/or funded any time between the first day of a tax year and the date a tax return is due for that year, excluding extensions. For most taxpayers, this due date is April 15 of the following year.

Are There Other Tax Advantages to Establishing an IRA?

EGTRRA added a unique tax credit for certain taxpayers who contribute to an IRA and/or an employer's salary deferral plan. See your tax professional for more information.

How Do I Open an IRA?

See any of our IRA representatives. We will explain the nature of these accounts in more detail and help you complete the forms necessary to establish your IRA.

This Web page is effective for tax-year 2012 and thereafter. This page is intended to provide general information concerning federal tax laws governing traditional IRAs. It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances. For specific information, you are encouraged to consult your tax or legal professional. IRS Publication 590, Individual Retirement Arrangements, and the IRS's web site, www.irs.gov, may also provide helpful information.