Retirement Plans - Traditional Individual Retirement Accounts (IRAs)


There are two types of Individual Retirement Accounts (IRAs) - Traditional and Roth. Each has unique eligibility rules and tax treatment, but the contribution limits are identical. Catch-up limits also apply to both IRA types and are available to those aged 50 and older.

These amounts are scheduled to rise over time as shown below:

YEAR Contribution Catch-up
2007 $4,000 $1,000
2008 $5,000 $1,000
2009 Indexed for inflation $1,000



Look Out!
The limits above apply jointly to both Traditional and Roth IRAs. For example, a 40-year-old client can contribute a total maximum of $4,000 in 2005 - so he/she could contribute $1,000 to a Traditional IRA and $3,000 to a Roth IRA, but not $4,000 to each.


Not all types of investments are permitted within IRAs. Permissible investments include stocks, bonds, mutual funds, annuities, government securities, and gold or silver coins minted by the U.S. Treasury. Other investments, such as collectibles, insurance policies, art, and other types of coins, are not permitted.

Traditional IRA
Any employed person is eligible to contribute to a Traditional IRA. However, the ability to deduct that contribution is subject to the following eligibility rules:

  • If a person is not currently covered by a retirement plan at work, IRA contributions are deductible in full.

  • If a person is currently covered by a retirement plan at work, IRA contributions are deductible only if income is less than the limits shown below:
YEAR Single Return Joint Return
2007 $50,000-$60,000 $80,000-$100,000
  • If income falls between the limits shown above, the contribution will be partially deductible - the deduction is "phased out" in proportion to the amount by which the income exceeds the lower limit in the range.

  • For a married couple, if only one spouse is covered by a pension plan, a different phase-out rule applies:
    • If combined income is $150,000 or less, the contribution for the non-covered spouse is fully deductible.

    • If combined income is between $150,000 and $160,000, a proportional phase-out applies.

    • If combined income is $160,000 or higher, no deduction applies.

    • These rules apply only to the non-covered spouse; contributions by the covered spouse are not deductible.


Look Out!
On the exam, you will not be tested on the actual dollar values for the phase-out. However, you will need to know that clients with high incomes are subject to different phase-out rules.


Traditional IRA Specifics:

  • Earnings are tax deferred until withdrawn.

  • If deductible contributions are made, 100% of withdrawals are subject to taxation at ordinary income rates.

  • If non-deductible contributions are made, a portion of each withdrawal is not taxable.

  • Withdrawals made prior to age 59 and a half are subject to a 10% penalty, unless one of the following exceptions applies:
    • Death
    • Disability
    • Eligible education expenses
    • First-time home-buying expenses (up to $10,000)
    • Distributions made over the life expectancy of the IRA owner

  • Contributions may not be made after the IRA owner turns 70 and a half - even if he or she is still employed.

  • Distributions made over the life expectancy of the IRA owner must begin no later than April 1 of the year following the year in which the owner turns 70 and a half.

  • If a person fails to withdraw any amount that should have been distributed under these mandatory minimum requirements, a 50% tax penalty applies to the amount not distributed.
Roth Individual Retirement Account


Related Articles
  1. Professionals

    Traditional IRA

    FINRA/NASAA Series 66: Section 4 Traditional IRA. This section discusses traditional IRA in greater detail.
  2. Professionals

    Individual Retirement Accounts (IRAs)

    FINRA/NASAA Series 26 Section 4 - Individual Retirement Accounts (IRAs). This section discusses Individual Retirement Accounts (IRAs) and traditional IRA in greater detail.
  3. Retirement

    Traditional IRAs: Contributions

    By Denise ApplebyFunding an IRA A Traditional IRA can be funded by several sources and means: Regular IRA contributions Spousal IRA contributions Transfers Rollover contributions Regular IRA ...
  4. Retirement

    Retirement Planning For 20-Somethings: Saving Options

    For the most part, you will be responsible for adding amounts to your retirement nest egg. However, if you work for an employer that provides benefits under a retirement plan, you may be able ...
  5. Professionals

    Individual Retirement Accounts (IRAs)

    FINRA/NASAA Series 66: Section 4 Individual Retirement Accounts (IRAs). This section explains the individual retirement account, IRA.
  6. Financial Advisors

    IRAs: Top Things You Need to Know About Them

    By understanding the major rules for both traditional and Roth IRAs, you'll be prepared to enjoy the benefits of these investment opportunities.
  7. Professionals

    Individual Plans

    Individuals may set up a retirement plan for themselves that are qualified and allow contributions to the plan to be made with pre-tax dollars. Individuals may also purchase investment products ...
  8. Professionals

    Other Tax-Advantaged Retirement Plans

    Other Tax-Advantaged Retirement Plans
  9. Professionals

    IRA Rules and Regulations

    FINRA/NASAA Series 26 Section 4 - IRA Rules and Regulations. In this section IRA contributions and catch-ups, rollover and transfers, penalties for early withdrawals from and excess contributions ...
  10. Retirement

    IRA Contribution Limits in 2016

    Find out about the 2016 limits for contributions and income thresholds for individual retirement accounts, including traditional IRAs and Roth IRAs.
RELATED TERMS
  1. Individual Retirement Account - ...

    An investing tool used by individuals to earn and earmark funds ...
  2. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  3. Spousal IRA

    A type of individual retirement account that allows a working ...
  4. Roth IRA

    An individual retirement plan that bears many similarities to ...
  5. IRS Publication 590: Individual ...

    A document published by the Internal Revenue Service (IRS) that ...
  6. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
RELATED FAQS
  1. I earn more than the income limit for both a Roth and Traditional IRA deduction. ...

    It is always a good choice to fund the individual retirement account (IRA), even if the owner is not eligible to claim the ... Read Answer >>
  2. Can an individual contribute to both a Roth IRA and a Traditional IRA in the same ...

    Yes, an individual can contribute to both a Roth IRA and a Traditional IRA in the same year. The total contribution into ... Read Answer >>
  3. My spouse has little/no income. Can I contribute to my spouse's IRA?

    Yes. You may make a Traditional IRA contribution to your spouse's Traditional IRA because you have eligible compensation.There ... Read Answer >>
  4. I make over $100,000/yr and my adjusted gross income precludes standard IRA contributions. ...

    With an adjusted gross income (AGI) of more than $100,000, only your eligibility to deduct contributions to a Traditional ... Read Answer >>
  5. What is the difference between a ROTH, SEP and Traditional IRA?

    The Roth IRA was established in 1996 as the newest addition to the individual retirement accounts (IRAs) available to individuals. ... Read Answer >>
  6. What are the main differences between a Simplified Employee Pension (SEP) IRA and ...

    Discover the difference between a simplified employee pension IRA and a traditional IRA so that you can choose the best retirement ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center