Traditional IRA

Taxpayers age 50 and over have a special catch-up period that allows them to add another $1,000 per year.

Your contributions and earnings grow tax-deferred until you begin withdrawals – usually not before age 59½. Withdrawals are taxed as ordinary income in the year they are taken out of the account. In most cases, the IRS treats withdrawals before the age of 59½ as ordinary income and imposes a 10 percent penalty on top of that.

Here are some additional features of traditional IRAs:

• You can make an early withdrawal (before age 59½) if you use the money for the purchase of a first home or to cover college costs.
• You must begin taking distributions by age 70½, and you can no longer contribute after this age.
• You can contribute to an IRA up until the date your income taxes are due for that year. For example, you could fund an IRA by April 15, 2009 and deduct the contribution from your 2008 taxes. However, the sooner you fund an IRA, the sooner it can start working for you.
• You can contribute up to $5,000 or 100 percent of your earned income, whichever is less. That limit will increase in future years.
• Many people find their IRA contributions are fully deductible; however, if you or your spouse participate in an employer-sponsored retirement plan – a 401(k), for example – you may not be eligible for a full deduction. Our "Is My IRA Deductible?" tool can help you determine your eligibility.

Any tax or legal information provided is a summary of our current understanding and interpretation of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their specific situation.

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