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Traditional IRA
A Traditional IRA account is Individual Retirement Account where contribution money is tax deductible if certain conditions are met. It is a tax-advantaged arrangement that allows earnings and deductible contributions to grow tax-deferred.
Account can be opened at any bank or broker (like Fidelity, E*TRADE Wells Fargo, etc).
Eligibility:
You are eligible if your age is less than 70 ½ yrs and you have taxable income. However you may not be able to deduct your contributions, if you are covered by employer retirement plan like 401K.
|
|
Adjusted gross income |
|||
|
Your
tax |
Tax year |
Full deduction |
Partial deduction |
No deduction |
|
Single/Head of Household |
2006 |
Up to $50,000 |
$50,000 - $60,000 |
Above $60,000 |
|
|
2008 |
Up to $52,000 |
$52,000 - $62,000 |
Above $62,000 |
|
Married Filing Jointly |
2006 |
Up to $75,000 |
$75,000 - $85,000 |
Above $85,000 |
|
|
2008 on |
Up to $83,000 |
$83,000 - $103,000 |
Above $103,000 |
|
Married Filing Separately |
2008 |
N/A |
$0 - $10,000 |
Above $10,000 |
Contribution limits:
|
Year |
Age <= 49 |
Age >= 50 |
|
2005 |
$4000 |
$4500 |
|
2006/07 |
$4000 |
$5000 |
|
2008 |
$5000 |
$6000 |
Advantages:
- Contributions are typically tax deductible, tax deferred till retirement.
- As tax is deferred, it also gets invested which is extra compared to Roth IRA!
- At retirement tax bracket is expected to be lower than now.
- Immediate tax benefit.
Disadvantages:
- Tax is not eliminated, but just deferred.
- After retirement, not only contribution but earnings also get taxed.
- Not deductible if you are covered by employer retirement plan like 401k.
Additional Resources:
Official and detail information about traditional IRAs can be found in this Publication 590 .