As I said in last week’s Financial Friday post, I am not an expert. I simply am hoping to give you a “lay person’s” information on IRAs. This week here are the basics of a Traditional IRA.
The big advantage of a Traditional IRA is the fact that contributions are made pre-taxes. In other words, the contributions can be deducted from your taxable income. Similar to the Roth IRA, contributions of up to $5,000 per year can be made and if you are 50 or older, you can contribute up to $6,000.
There are income limits for contributing to a Traditional IRA. For 2012, if you are married filing jointly your income must be below $92,000 to contribute. If filing single, head of household, or married filing separately, your income must be below $58,000. These limits are for those who ARE participating in an employer retirement plan as well.
If you are NOT participating in an employer retirement plan, any Modified Adjusted Gross Income (MAGI) allows for a full deduction. However, if you are married filing jointly and your spouse is participating in an employer’s retirement plan, your MAGI must be below $10,000 to claim a partial deduction.
One important thing to keep in mind with a traditional IRA: contributions and interest are taxed when they are taken out. You must wait until age 59 1/2 to withdraw without a 10% tax penalty. There are some exceptions such as disability and for first-time home buyers. Please contact a tax professional for full details.