- Traditional IRA allows investors to deduct contributions to their account.
- The maximum contribution amount for a Traditional IRA is $5,500 annually if you’re under 50 years of age and $6,500 if you’re 50 or order.
- Withdrawals from your IRA will be taxed, and there is a 10% penalty for early withdrawals.
A Traditional IRA is a retirement savings account available to anyone who can make contributions and is under age 70 1/2. There are no income limits to qualify but the attractive tax benefits are only available to individuals who meet certain eligibility requirements.
Benefits of a Traditional IRA
Depending on whether your employer provides a retirement plan and your income level, all or part of your annual contributions to a Traditional IRA may be tax-deductible. Keep in mind that to determine your allowable deduction, you must review your modified adjusted gross income, which adds deductions such as student loan interest and rental losses back to your adjusted gross income.
Allowable deduction if you’re covered by an employer’s retirement plan:
|Tax Filing status||Modified AGI||Allowable deduction|
|Single or head of household||< $61,000||Full deduction|
|>$61,000 but < $71,000||Partial deduction|
|> $71,000||No deduction|
|Married filing separately||< $10,000||Partial deduction|
|> $10,000||No deduction|
|Single, head of household, or married filing separately||< $98,000||Full deduction|
|> $98,000 but < $118,000||Partial deduction|
|> $118,000||No deduction|
The IRS also provides details on allowable deductions for those not covered by an employer’s retirement plan. In addition to deductions, investors in low to medium income levels may also receive a Retirement Savings Contributions Credit (Saver’s Credit), which can range from 10% to 50% of your contributions.
Traditional IRA Rules
The annual contribution limit is $5,500 for individuals under 50 years old and $6,500 for individuals 50 and over. Distributions are taxed just as any other income would be. There is a 10% penalty for any distribution made before you are 59 ½ years old. Once you reach age 70 ½, you may no longer make contributions and actually must begin to make withdrawals. Minimum required distributions are based on life expectancy calculated by an IRS worksheet.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.