IRS & Traditional IRA
The framework for traditional Individual Retirement Accounts (IRAs) is established by the Internal Revenue Service (IRS) tax code. Traditional IRAs are tax-advantaged accounts that give you a tax break on your contributions.
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Significance
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If you qualify, you can deduct your annual traditional IRA contribution from your income. Also, the assets you purchase with your IRA contributions are tax-deferred, so you can let your earnings compound rather than withdraw them to pay your tax bill. Qualified withdrawals are taxed at your income tax rate.
Features
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The IRS limits how much you may contribute to an IRA in a given year. In 2010, contributions are capped at $5,000 if you are under 50 and $6,000 if you are older. Also, your contribution cannot exceed your earned income, unless you are a non-earning spouse who files jointly with your partner.
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Considerations
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Though you can always contribute to a traditional IRA and take advantage of tax-deferred earnings, you may not be able to deduct your contribution. If you participate in a retirement plan through work, income limits apply. These are subject to change annually.
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