Traditional IRA Guidelines
A traditional individual retirement account is a savings plan for individuals with earned income. Contributions can be made any time, and a person can begin to withdraw funds from a traditional IRA at age 59 1/2, even while employed. A person can have both a traditional IRA and another type of retirement account, such as a 401(k) plan. A traditional IRA can be opened at a bank, through an investment broker or any other financial institution.
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Contributions
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An IRA can be opened at any age by a person who is earning money. Participants must be younger than 70 1/2 years old and can deposit up to $5,000 per year ($6,000 for those older than 50). A person cannot contribute more money than he makes in a single year to an IRA.
Withdrawals
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The account holder may begin to withdraw money from a traditional IRA at age 59 1/2 without penalty. At age 70 1/2, she is required to withdraw a minimum amount from the account each year based on the amount in the IRA. Withdrawals, including required minimum distribution, from a traditional IRA are considered income and are subject to federal and state income taxes.
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Penalties
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Any money that is withdrawn from a traditional IRA before age 59 1/2 is subject to a 10 percent penalty. Money taken out of an IRA within two years of opening the account is subject to a 25 percent penalty. The account will also be penalized, up to 50 percent, if the required minimum distribution is not met after age 70 1/2.
Early Withdrawal Exceptions
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In certain cases, money can be withdrawn from a traditional IRA penalty-free before the participant reaches 59 1/2 years old. Money used for a first home purchase and some educational and medical expenses can be taken from the account early. Money can also be withdrawn without penalty if the account-holder becomes disabled.
Tax Benefits
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Traditional IRA contributions can be tax-deductible. Contributions are fully deductible for people who do not have employer-sponsored retirement plans, such as a pension or 401(k). For those who also have an employer-sponsored plan, a portion of the contribution may be deductible, depending on the values of retirement accounts. Interest earned in a traditional IRA account is also tax-deferred, meaning taxes are not paid on account earnings until money is withdrawn.
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