Traditional IRA

(for individual investors)

What is a Traditional IRA?

A Traditional IRA (Individual Retirement Account) is a personal savings plan that gives you tax advantages for setting aside money for retirement. In 2008 the contribution limit is $5,000 or $6,000 for those age 50 or older (2007 limits of $4,000 and $5,000 if age 50+). Some of the investments that may be selected inside a Traditional IRA are mutual funds, annuities, stocks, bonds and CD's.

Individuals can also transfer or "rollover" their employer sponsored retirement plans (401k, 403b, 457, or pension) into a rollover IRA. This type of account transaction is often referred to as a "401k Rollover". There is no dollar limit on the amount that can be rolled over from an employer sponsored retirement plan into a new IRA and there are several advantages of doing so.

What are the benefits of a Traditional IRA?

For many investors, contributions to a Traditional IRA are tax-deductible from federal income taxes and also tax-deductible from state income taxes in most states.

A Traditional IRA allows your assets to grow tax-deferred, meaning you won't pay taxes on the dividends and investment earnings until you withdraw the assets. Tax deferred earnings growth can have a powerful effect over time.

Who can contribute to a Traditional IRA?

Business owners, self employed, independent contractors, employees who do not have retirement plans through their employer and non-working spouses. Investors who participate in an employer sponsor retirement plan such as a 401k can also contribute to a Traditional IRA. However the contribution may not be tax deductible depending on your income.

What are the disadvantages of a Traditional IRA?

Low maximum contributions. Business owners, self employed individuals and independent contractors who would like to make greater retirement contributions may want to research a Solo 401k or a SEP IRA.

When can I withdraw assets from my Traditional IRA?

Money can be withdrawn from a Traditional IRA after age 59 1/2 although you will pay regular income taxes on your distributions. If you should withdraw money prior to age 59 1/2 you will incur an additional 10% penalty. For most investors saving for retirement in a Traditional IRA is advantageous. During your higher tax bracket working years you are able to get a tax deduction on your annual contributions, and earn many years of tax deferred growth on your dividends and investment earnings. Once retired and usually in a lower tax bracket you can withdraw the money as needed from your Traditional IRA.

Can I withdraw from my Traditional IRA and avoid the 10% penalty?

There are several exceptions when you could withdraw money prior to age 59 ½ rule and not incur a 10% penalty, and they are as follows:

• You have non-reimbursed medical expenses that are more than 7.5% of your adjusted gross income (but the distributions can't be more than the cost of your medical insurance)
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You are receiving substantially equal distributions according to IRS rule 72t
• The distributions are for qualified higher educational expenses.
• The distributions are used to buy or build a first home ($10,000 maximum distribution)

When must I take distributions from my Traditional IRA?

Minimum distributions are required by the IRS according to a specific formula once you reach age 70 ½.

Note: Individuals may not be eligible to contribute to a Traditional IRA depending on an individual's income and depending on whether he or she participates in an employer sponsored retirement plan such as a 401k.

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Disclosures:

*  The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.