Special Issues for Retirement Plans - Traditional IRA

Any employed person is eligible to contribute to a Traditional IRA, but not all such contributions are deductible from income taxes. Deductibility is a factor of income as well as coverage under an employer retirement plan. Such deductions are 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
2004 $45,000-$55,000 $65,000-$75,000
2005 $50,000-$60,000 $70,000-$80,000
2006 $50,000-$60,000 $75,000-$85,000
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.

Exam Tips and Tricks
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.

The following information applies to Traditional IRAs only:

  • Earnings are tax-deferred until withdrawn.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 ½ are subject to a 10% penalty, unless one of the following exceptions applies:
    • Death
    • Disability
    • Eligible educational 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 age 70 ½ - 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 age 70 ½.
     
  • 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.

For more on how a traditional IRA works, how to set one up and even how to withdraw from it, review the tutorial Traditional IRAs.

Roth IRAs
Related Articles
  1. Professionals

    Top Strategies on How to Become a Stock Broker

  2. Professionals

    Should You Add A Securities License To Your Qualifications?

RELATED TERMS
  1. Series 79

    A examination to ensure a candidate is qualified to become a ...
  2. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  3. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  4. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  5. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
  6. Series 28

    An exam given by the Financial Industry Regulatory Authority ...

RELATED FAQS

  1. If I have only a limited amount of time to study for the Series 6, what should I ...

    Learn what to focus on when studying for the Series 6 while reviewing important aspects of the exam, including its content ...
  2. What role does the 'chip cycle' play in the electronics sector?

    Read about some of the best and most popular test prep classes for the Series 6 FINRA securities licensing exam, including ...
  3. What does passing the Series 6 enable me to do?

    Learn more about the Series 6, what the examination and license are and what the license enables an individual to buy, sell ...
  4. What are the differences between the Series 6 exam and the Series 7 exam?

    Learn about the regulatory exams needed to become a limited or registered representative and the main differences between ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!