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Traditional IRAs

 

A traditional IRA is a special type of personal savings plan that provides certain tax advantages to encourage you to save money for retirement.


men playing golfIn General

Prior to 1997, there was only one type of IRA. Because it was the only type, it didn't have a special name--it was simply called an IRA. However, as a result of the Taxpayer Relief Act of 1997, this "original" IRA came to be called the "traditional" IRA to distinguish it from the newly created Roth IRA.

A traditional IRA is a special type of personal savings plan that provides certain tax advantages to encourage you to save money for retirement. For 2010 and 2011, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to a traditional IRA. You may also be able to contribute up to the same amounts to a traditional IRA for your spouse. Funds in a traditional IRA grow tax deferred until they are paid out to you.

Deductible versus nondeductible contributions

There are two types of contributions that you can make to a traditional IRA: deductible contributions and nondeductible contributions. When you make deductible contributions, you reduce your taxable income for the year, so the dollars that you contribute are pretax. Those dollars will not be taxed until you withdraw them from the IRA. When you make nondeductible contributions, you contribute after-tax dollars that will not be taxed again later when you withdraw them from the IRA. The portion of any withdrawal that represents investment earnings is always taxed.

Your ability to make a deductible contributions to a traditional IRA depends on your annual income, your income tax filing status, and whether you (or, in some cases, your spouse) are covered by an employer-sponsored retirement plan.

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