Rules & Regulations for Traditional IRA Accounts
The traditional IRA is a consumer retirement savings program established by the Employee Retirement Income Security Act of 1974. It allows consumers not covered by employer retirement savings plans to contribute no more than $5,000 annually as of 2011. Over the years, the traditional IRA has become a more dynamic savings program for those not covered by employer plans and those who are.
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Annual Contributions
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The maximum annual contribution to a traditional IRA in 2011 is $5,000 for all IRA owners under the age of 50. Those older than 50 can contribute an additional $1,000 in what is called a "catch up" contribution that helps those closer to retirement more adequately fund retirement savings. If legislation doesn't alter the contribution limits, maximum contributions limits will adjust for inflation starting in 2012. Annual contributions can be made up until April 15 when filing taxes for the previous year.
Deduction and Deferral
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The traditional IRA reduces annual income dollar for dollar. In order to contribute the money, you must have earned income equaling at least the amount you are contributing. You are allowed to deduct the contribution on your tax return, reducing adjusted gross income. The IRS allows distributions from traditional IRAs starting at age 59 1/2. Distributions after this age are added to gross income for the year the money is taken out. Distributions before this age have 10 percent taken by the IRS as a tax penalty for early distribution.
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Investments
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The IRS allows many different types of investments offered through a variety of custodians. Banks can offer savings or certificate of deposit IRAs. Brokerage firms allow stocks, bonds and mutual funds. There are real estate IRAs, precious metal IRAs and insurance annuity IRAs. Investors are responsible for understanding all regulations of each type of investment. For example, a real estate IRA requires that the property is an investment property and not a personal residence for yourself, a child or grandchild. Different investments give investors options to develop and maintain a diversified investment portfolio that meets long-term investment objectives.
Income Limits
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Not everyone qualifies to make a tax-deductible contribution to a traditional IRA. If you are not covered by your employer and file your tax return as a single filer, there is no income limit to make the full contribution and get a full deduction. However, a married couple filing taxes jointly who are not covered by an employer's retirement plan must make less than $169,000 jointly to take the full deduction. Joint filers making between $169,000 and $179,000 can take a partial deduction with all others not able to take a deduction for contributions. Those covered by employer plans have lower limits. Single filers have income limit ranges between $56,000 to $66,000 while married couples filing jointly have limits between $90,000 and $110,000.
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