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A traditional IRA is an individual retirement arrangement (IRA), established in the United States by the Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93–406, 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18). Normal IRAs also existed before ERISA. The IRA is held at a custodian institution such as a bank or brokerage, and may be invested in anything that the custodian allows (for instance, a bank may allow certificates of deposit, and a brokerage may allow stocks and mutual funds). Unlike the Roth IRA, the only criterion for being eligible to contribute to a Traditional IRA is sufficient income to make the contribution. However, the best provision of a Traditional IRA — the tax-deductibility of contributions — has strict eligibility requirements based on income, filing status, and availability of other retirement plans (mandated by the Internal Revenue Service). Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal income tax (see below for details). This is in contrast to a Roth IRA, in which contributions are never tax-deductible, but qualified withdrawals are tax free. The traditional IRA also has more restrictions on withdrawals than a Roth IRA. With both types of IRA, transactions inside the account (including capital gains, dividends, and interest) incur no tax liability.
According to IRS pension/retirement department as of July 13, 2009, Traditional IRAs (originally called Regular IRAs) were created in 1975 and made available for tax reporting that year as well. The original contribution amount in 1975 was limited to $1,500 or 15% of the wages/salaries/tips reported on line 8 of the Federal form 1040 (1975).
Traditional IRA contributions are limited as follows:
|Year||Age 49 and Below||Age 50 and Above|
* Since 2009, contribution limits have been assessed for potential increases based on inflation, though the contribution limits for 2009 through 2012 remained unchanged.
All United States taxpayers can make IRA deposits and defer the taxation of earnings. However, as explained below, the deposits are not deductible from income under certain circumstances. Accordingly, traditional IRAs are sometimes referred to as either "deductible" or "non-deductible."
If a taxpayer's household is covered by one or more employer-sponsored retirement plans, then the deductibility of traditional IRA contributions are phased out as specified income levels are reached (Modified Adjusted Gross Income is between).
|Year||Married Filing Jointly or Qualified Widow||Married Filing Jointly (and you were not covered by an employee-sponsored retirement plan but your spouse was)||Single, Head of Household or Married Filing Separately (and you did not live with your spouse)||Married Filing Separately (and you lived with your spouse at any time during the year)|
|2007||$83,000 and $103,000||$156,000 and $166,000||$52,000 and $62,000||$0 and $10,000|
|2008||$85,000 and $105,000||$159,000 and $169,000||$53,000 and $63,000||$0 and $10,000|
|2009||$89,000 and $109,000||$166,000 and $176,000||$55,000 and $65,000||$0 and $10,000|
|2010||$89,000 and $109,000||$167,000 and $177,000||$56,000 and $66,000||$0 and $10,000|
|2011||$90,000 and $110,000||$169,000 and $179,000||$56,000 and $66,000||$0 and $10,000|
|2013||$95,000 and $115,000||$178,000 and $188,000||$59,000 and $69,000||$0 and $10,000|
|2014||$96,000 and $116,000||$181,000 and $191,000||$60,000 and $70,000||$0 and $10,000|
|2015||$98,000 and $118,000||$183,000 and $193,000||$61,000 and $71,000||$0 and $10,000|
The lower number represents the point at which the taxpayer is still allowed to deduct the entire maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to deduct at all. The deduction is reduced proportionally for taxpayers in the range. Note that people who are married and lived together, but who file separately, are only allowed to deduct a relatively small amount.
To be eligible, you must meet the earned income minimum requirement. In order to make a contribution, you must have taxable compensation (not taxable income from investments). If you make only $2000 in taxable compensation, your maximum IRA contribution is $2000.
Conversion of all or a part of a Traditional IRA account to a Roth IRA results in the converted funds being taxed as income in the year they are converted (with the exception of non-deductible assets).
Prior to 2010, two circumstances prohibit a conversion to a Roth IRA: Modified Adjusted Gross Income exceeding $100,000 or the participant's tax filing status is Married Filing Separately. With recent legislation, as part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), the modified AGI requirement of $100,000 and not be married filing separately criteria were removed in 2010.
There may be a benefit from conversion in addition to the preferential timing of tax. The taxes due need not deplete the account balance converted. If the taxes are paid from another taxable account, the effect is as if the income from those dollars are sheltered from tax.
Transfers and rollovers are two ways of moving IRA sheltered assets between financial institutions.
A transfer is normally initiated by the institution receiving the funds. A request is sent to the disbursing institution for a transfer and a check (made payable to the other institution) is sent in return. This transaction is not reported to the IRS.
A rollover (sometimes referred to as a 60 day rollover) can also be used to move IRA money between institutions. A distribution is made from the institution disbursing the funds. A check would be made payable directly to the participant. The participant would then have to make a rollover contribution to the receiving financial institution within 60 days in order for the funds to retain their IRA status. This type of transaction can only be done once every 12 months with the same funds. Contrary to a transfer, a rollover is reported to the IRS. The participant who received the distribution will have that distribution reported to the IRS. Once the distribution is rolled into an IRA, the participant will be sent a Form 5498 to report on their taxes to nullify any tax consequence of the initial distribution.
A loan from an IRA is prohibited. It is considered a prohibited transaction and the IRS may disqualify your plan and tax you on the assets. Some use the 60 day rollover as a way to temporarily take funds from an IRA. A participant will take a distribution and, in turn, all or some of the distribution that the participant takes may be rolled back into the same IRA plan within the allowed period to retain its tax deferred status. One 60 day rollover is allowed every rolling 12 months, per IRA. For instance, if you withdraw any amount from IRA-1 and deposit it into IRA-2 (as a tax-free rollover), you cannot make another tax-free rollover of any funds from IRA-1 or IRA-2 for 365 days. However, this would not prevent you from making a tax-free rollover from another IRA.