Traditional IRA

🇺🇸 An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also open an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements.

ICI (Investment Company Institute) reports that at year end 2018, Traditional IRA's held an estimated $8.806 trillion of investor's wealth accounting for 85% of total IRA assets,

Types of IRAs
The Traditional IRA was created in 1974 with the passage of the Employee Retirement Income Security Act (ERISA) Over the years, the Traditional IRA has been expanded to include a growing number of specialized plan types. These include:
 * Non-deductible Traditional IRAs
 * Roth IRAs
 * SEP (Simplified Employee Pension) IRAs
 * SIMPLE IRAs
 * Coverdell Education Savings Accounts (ESAs)

There are two basic types of personal IRA's: Traditional and Roth. See Roth versus Traditional for more guidance.

Contribution Eligibility and Limits
An individual can contribute to a Traditional IRA up to the year one reaches 70 1/2. The individual must have earned income (wage or business) in order to contribute to a Traditional IRA. Married taxpayers filing joint returns can contribute to a Spousal IRA for the non-working spouse, assuming sufficient earned income. Contributions can be made into an IRA up to the due date of an individual's tax return. For example, most taxpayers can make 2011 IRA contributions up through April 15, 2012. Starting in 2008, the annual contribution limits have been indexed to inflation in $500 increments. Taxpayers age 50 and above are entitled to make additional "catch-up" contributions to their IRAs. Contributions are limited to the following annual amounts:

If you or your spouse are covered by an employer provided plan through your employer, your deductible IRA contribution may be limited according to the amount of one's modified adjusted gross income, defined as:

The following tables show deductible income limits for individuals, based on filing status and whether they are or are not covered by an employer plan:

If one's income results in partial deductibility of contributions, one needs to refer to the appropriate tax table to determine the allowable deductible contribution. See Non-deductible Traditional IRA page for income limits based on your tax filing status.

For married couples with a MAGI between $121,000 and $199,000 in tax year 2017, the contribution result in a situation where one member of the couple is eligible to make deductible IRA contributions (such as a non-working spouse, or a spouse working part time or as a consultant or at a company without a retirement plan) while the other member of the couple (the one working at a company with a retirement plan) is not eligible for deductible IRAs, but might still be eligible for Roth IRAs.

Rollovers and Transfers
A significant amount of Traditional IRA assets and annual contributions come from the transfer or rollover of employer retirement plan assets. The Employee Benefit Research Institute (EBRI) 2018 report states that in 2016 IRA rollovers were 16 times the amount of IRA contributions. These transfer/rollovers occur when an employee severs employment from the employer whether voluntarily through job switching or retiring, or through lay-offs or firings. Employees may wish to transfer an employer plan to a Traditional IRA in order to consolidate accounts, reduce plan management expense, or to retain the right to transfer the transferred assets to another employer provided plan. Transfers of Traditional IRA accounts occur in three manners:


 *  Direct Trustee-to-Trustee Transfers
 * Rollovers
 * Transfers incident to a divorce

IRA rollovers and transfers can become complicated. Refer to IRA Rollovers and Transfers for detailed consideration of this topic.

Required Minimum Distributions
With a traditional IRA, starting with the calendar year you reach age 70½, you must withdraw at least a minimum amount each year. This is called your Required Minimum Distribution (RMD). For your very first RMD you have until April 1 of the calendar year following the year you turn 70½ to take the RMD. For each subsequent year, you'll need to take your annual RMD by December 31 of that year. But be aware that if you delay your initial RMD until April 1 of the year after you turn 70½, you will end up taking (and being taxed on) two RMDs that year. Thus delaying your initial RMD may act to needlessly push you up into a higher tax bracket.

The Required Minimum Distribution rules for participants in employer plans have a minor difference from those of traditional IRAs. Persons who are still working at age 70½ can wait until April 1 of the calendar year following the year they retire to perform their first RMD.

Another twist to be cognizant of is that for each calendar year you are required to take a RMD, the RMD must be the first money to leave the account(s). For example, if you wanted to perform a Roth conversion from a traditional IRA account in a calendar year that also has a RMD, the RMD must be completed before you perform a subsequent Roth conversion. If you reverse this sequence, the IRS will consider you to have improperly contributed RMD funds into the Roth account. This twist can cause particular problems for the year you turn 70½, since you have until April 1 of the following year to complete the RMD, but can't perform a Roth conversion until the RMD is completed.

The amount of your required minimum distribution is equal to your retirement account balance as of December 31 of the previous year (adjusted for any outstanding rollovers, asset transfers, or conversions completed during the prior year that are recharacterized in the current one) divided by your life expectancy factor according to the IRS Uniform Lifetime Table.

You may combine your IRA accounts (non-inherited) for the purposes of calculating the RMD. 403(b) plans have similar rules. However, 401(k) and 457(b) plans must take the distributions separately from each account.

Penalties: Early Withdrawals and Excess Contributions
Early Withdrawals

Early withdrawals are generally amounts distributed from your traditional IRA account before you are age 59 1/2. You must pay a 10% additional tax on the distribution of any assets from your traditional IRA before you are age 59 1/2.


 * Exceptions to the penalty apply if the early withdrawal is:
 * made to a beneficiary or estate on account of the IRA owner's death,
 * made on account of disability,
 * made as part of a series of substantially equal periodic payments over your life or life expectancy,
 * made to pay for a qualified first–time home purchase,
 * not in excess of your qualified higher education expenses,
 * not in excess of certain medical insurance premiums paid while unemployed,
 * not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income, or
 * due to an IRS levy.

Excess Contributions

Contributing more than the allowed amount in any year to your traditional IRA also subjects you to an additional tax. Any excess contribution not withdrawn by the date your tax return for the year is due (including extensions) is subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year.

IRS

 * Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), (PDF)
 * Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), (PDF)
 * IRS Publication 590 Individual Retirement Arrangements (IRAs), 2013. Superseded by 590-A and 590-B.
 * IRS Whats New: IRAs and Other Retirement Plans