The Traditional IRA came into existence in 1974 with the passing of the Employee Retirement Income Security Act (ERISA). Through the years, adjustments and additions have been made, but the intent for the Traditional IRA to provide an avenue for individuals to save for retirement has stayed the same. In this short piece, we'll detail the features of the Traditional IRA.
In order to contribute to a Traditional IRA, you need to have earned income. This can come in the form of a job, interest/dividends received from investments, or withdrawals from a taxable account.
In 2023, the contribution limit is $6,500 if you are 49 years or younger. If you are 50 years or older, you get an extra $1,000 (catch-up contribution), bringing your total limit to $7,500.
Contributions to a Traditional IRA qualify for a tax deduction as long as you don't make too much money and/or if you've contributed to a workplace plan.
If you contribute to a workplace plan, the below figures apply to you.
In 2023, if you are single and your income falls below $73,000, you are eligible for the full deduction. If you are single and make between $73,000 and $83,000, you are eligible for a partial deduction. If you are single and make over $83,000, you are not eligible for a deduction.
In 2023, if you are married and file jointly and your income falls below $116,000, you are eligible for the full deduction. If you are single and make between $116,000 and $136,000, you are eligible for a partial deduction. If you are single and make over $136,000, you are not eligible for a deduction.
If you are not covered by a workplace plan, the below figures apply to you.
In 2023, if you are single, there is no income limit and you by default qualify for the tax deduction.
In 2023, if you are married and file jointly and your income falls below $218,000, you are eligible for the full deduction. If you are single and make between $218,000 and $228,000, you are eligible for a partial deduction. If you are single and make over $228,000, you are not eligible for a deduction.
With regard to distributions, there are a few different rules and types of rules that apply.
You must wait until you reach the age of 59 1/2 to withdraw money penalty-free. If you don't, a 10% tax penalty will be assessed and you'll see that at tax time. There are exemptions to the 10% tax penalty and they are as follows:
- Unreimbursed medical expenses (over 7.5% of AGI)
- Health insurance premiums while unemployed, for one of the following reasons
- You lost your job.
- You were granted unemployment benefits for a period of 12 weeks.
- You either received the disbursements in the same year you received your unemployment benefits or the next year.
- The payments were made to you no later than 60 days after you started working again.
- Permanent disability
- Qualified higher education expenses
- Inherited IRA - death distribution
- First primary residence - up to $10,000
- Substantially equal periodic payments
- Fulfill IRS levy
- Called to active duty
For more information on that, visit the IRS website.
When you reach a certain age, you have to start withdrawing money from your account. Thanks to SECURE Act, that age is 73. In 2033, that age will move to 75. It's called a Required Minimum Distribution (RMD). If you don't withdraw and you're required to, you'll pay a penalty. The penalty is 50% of the amount you should have withdrawn.