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Traditional IRA

A Traditional IRA defers taxes on earnings until distribution, and may allow you to take a deduction for your contributions as well.


If you are under age 70 1/2 for the entire tax year and have earned income (or taxable alimony), you can have an IRA, even if you participate in a pension plan established by an employer.

Contribution Limit

The 2012 contribution limit is $5,000; the contribution limit for age 50 and older is $6,000.

Tax Deductibility

Deductibility depends on income and participation in an employer-maintained retirement plan. If you are not an active participant in an employer-maintained retirement plan, you are eligible for a full deduction, no matter what your income.

For single filers who are active participants in an employer-maintained retirement plan and you make contributions in tax year 2011, you may fully deduct your contributions if your MAGI is $56,000 or less; you may partially deduct your contributions with a MAGI between $56,000 and $66,000.

For joint filers who are active participants, the limits for full deductibility are $90,000 or less; partial deductibility limits are $90,000 to $110,000.

If you are not eligible for a deductible IRA, you can still make non-deductible contributions to an IRA, or you may be eligible for a Roth IRA.

Distributions without IRS Penalties

Distributions after you reach 59 1/2 are without IRS penalty. There are also no penalties if you become disabled, upon your death, if the distributions are part of certain periodic payments, for medical expenses greater than 7.5% of your adjusted gross income or for health insurance if you've been unemployed and have been receiving unemployment payments for 12 weeks, for certain higher education expenses, or for a first-time home purchase.

In addition, when you reach age 70 1/2, you must begin taking distributions to avoid IRS penalties.

Taxes on Distributions

If you are over age 59 1/2, simply include the taxable portion of the amount withdrawn (generally the deductible contributions and all earnings) as income on your tax return. If you are under age 59 1/2 and do not meet one of the exceptions, you must also pay a 10% IRS penalty for premature distribution, in addition to including the amount withdrawn as income on your tax return.

The nondeductible portion of the distribution is not subject to either income tax or the 10% premature distribution penalty.

Spousal IRA

The spousal IRA rule allows a married person with an adjusted gross income of less than $160, 000 to make an IRA contribution for his/her spouse. A couple can contribute up to 100% of their combined earnings.

Contribution Deadline

IRAs for the taxable year can be opened and funded at any time between January 1 and the date the tax return is due, excluding extensions. For most people, this means that you can fund a 2012 IRA from January 1, 2012 through April 15, 2013.

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