Traditional Individual Retirement Accounts (IRAs)

Traditional Individual RetirementA traditional individual retirement account

(IRA)

Can be a great way to save for retirement. It's a personal savings account that provides tax advantages, and if you don't participate in an employer-sponsored retirement plan or if you'd like to supplement your employer-sponsored retirement plan, a traditional IRA could be a good investment choice for you.

Money contributed to a traditional IRA goes into a

Tax-deferred savings

Account from a financial institution. Traditional IRA contributions may be tax-deductible, and contribution limits are indexed annually for inflation. Because the IRA is tax-deferred, you do not pay taxes until you start receiving distributions during your retirement, by which time you may be in a lower tax bracket.

Traditional IRAs can be contributed to directly or

Assets can be transferred

Into a traditional IRA from other qualified employer-sponsored retirement plans. For example, a Simplified Employee Pension IRA (SEP), a 401(k) or a 403(b) retirement plan can be rolled over into a traditional IRA when you retire or change jobs.

In 2010, you may be eligible to make a tax-deductible IRA contribution of up to $5000. ($6000 if you are age 50 or older and you wish to make "catch up" contributions.) However, if you are an active participant in a qualified retirement plan through your workplace, such as an employee pension plan or a 401(k), your IRA deduction could be reduced or eliminated based on your amount of income.

For example, if you are employed full-time but are not an active participant in an employer-sponsored retirement plan, your IRA contributions are fully tax deductible. If your modified adjusted gross income (AGI) is $56,000 or less as a single filer ($89,000 or less for married couples), you can also receive the full tax deduction. If your AGI is between $56,000 and $66,000 for a single filer ($89,000 to $109,000 for married couples filing jointly) you are only allowed partial deductions. And if your modified AGI is more than $66,000 as a single filer ($109,000 for married couples), you are ineligible for tax deductions. If you are ineligible for tax deductions, a Roth IRA or other retirement option may be a better choice for your retirement plan.

The money invested in a traditional

IRA is tax-deferred

you pay taxes only when you begin receiving retirement distributions of your investment, and after retirement you may be in a lower tax bracket. IRA withdrawals are taxed as ordinary income, unless taken prior to age 59½. If withdrawals are taken prior to age 59½, the withdrawal may also be subject to a 10% federal income tax penalty. There are exceptions to this penalty, however, based on disability, unemployment, qualified first home expenses (up to a $10,000 lifetime limit) or expenses used to fund higher education.

With a traditional IRA, you are

Required to withdraw a minimum amount

Of money from your IRA account no later than April 1 of the year after you reach 70½. This amount, the minimum required distribution (MRD) has to be withdrawn. If you do not withdraw the MRD by that time, you are subject to a 50% federal income tax penalty on the amount that should have been withdrawn. However, you can always withdraw more than the minimum amount.

A traditional IRA can be a

Valuable

Part of your retirement plan, with significant tax benefits for some investors. A professional financial advisor can help you decide whether a traditional IRA is the right choice for your individual retirement needs.

This article is not intended to be tax or legal advice, and the information in it may not be relied on for the purpose of avoiding federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.