Q. What is a Traditional IRA?
A. A Traditional IRA is a type of retirement plan that has been in existence
since 1975. Traditional IRAs offer tax-deferred earnings and the possibility
for tax-deductible contributions. These tax advantages make the Traditional
IRA a powerful tool in creating a balanced, long-term savings plan.
Q. How does a Traditional IRA work?
A. You can contribute to a Traditional IRA if you earn compensation and
you will not reach age 70 1/2 by the end of the year. If you file a joint
tax return, you can treat your spouse's compensation as your own (except
your combined contributions cannot exceed your combined compensation).
All earnings in a Traditional IRA are not taxed until they are withdrawn.
The ability to defer taxes on the earnings, and to withdraw in a year
when you may be in a lower tax bracket, can mean more after-tax dollars
for your retirement.
Q. How much can I contribute to a Traditional IRA?
A. If you meet the eligibility tests described above and you are under
age 50, you can contribute up to $5,000. For owner's age 50 and older,
your limits increase to $6,000.
Q. Can I still contribute to a Traditional IRA if I participate in
an employer-sponsored retirement plan?
A. Yes, your participation in an employer-sponsored retirement plan will
not affect your ability to contribute to a Traditional IRA (assuming age
and compensation requirements are met). However, higher-income earners
will lose their ability to deduct their Traditional IRA contributions
if participating in an employer-sponsored plan.
Q. If I already have a Roth IRA, can I have a Traditional IRA, too?
A. Yes, you can. However, the limits on annual contributions described
on the previous page apply to any combination of Traditional and Roth
IRA contributions that you make for the year.
Q. How much can I deduct?
A. If you are single, or married and neither spouse is an active participant
in a qualified retirement plan, your Traditional IRA contribution is deductible
regardless of income. If you or your spouse is an active participant,
you may deduct contributions only if your income is below certain limits.
Smaller deductions are available if your income is within the phase-out
range, which is determined by your filing status. Higher-income earners
with retirement plans may still contribute, but deductions are not available
if income is over the phase-out range.
If you have questions about your specific tax situation, please consult
your tax advisor for an interpretation of how these rules apply to you.
Q. Can I get any tax credits for making IRA contributions?
A. You may be able to receive a tax credit for making contributions. The
full credit is 50 percent of the first $2,000 of contributions. The full
credit is available for joint filers who have joint Modified Adjusted
Gross Income (MAGI) up to $33,000, heads of households with MAGI up to
$24,750, or other filers with MAGI up to $16,500. Smaller tax credits
are available for joint filers with MAGI up to $55,500, heads of households
with MAGI up to $41,625, or other filers with MAGI up to $27,750.
Q. What about income taxes when I withdraw from my Traditional IRA?
A. You will owe income taxes when you withdraw from your Traditional IRA.
However, if you make nondeductible contributions to a Traditional IRA,
a portion of each withdrawal will be treated as the nontaxable return
of these contributions.
Q. If I make an early withdrawal from my Traditional IRA before age
59 1/2, do I pay a penalty?
A. In general, you must pay a ten percent tax on early distributions or
withdrawals before age 59 1/2. But the early distribution tax does not
apply in the following situations:
a) Amount is rolled over or directly transferred to another Traditional
IRA
b) Amount is properly converted to a Roth IRA
c) Withdrawal of an excess contribution before the tax return is due
d) Withdrawal of an excess contribution after the filing deadline if certain
conditions are met
e) Payment is made to your beneficiaries after your death
f) Withdrawal of up to $10,000 is for first-time home purchase
g) Amount is used to pay for qualified postsecondary education expenses
h) Amount is used to pay for medical expenses in excess of 7.5% of adjusted
gross income (AGI)
i) Amount is for pre-59 1/2 periodic payments
j) Distribution is to an owner who is disabled (as defined by the IRS
code)
k) Distribution is for medical insurance premiums during unemployment
that lasts 12 weeks or longer
Q. When must I begin taking distributions from my Traditional IRA?
A. You must begin taking required minimum distributions from your Traditional
IRA at age 70 1/2. The minimum distributions each year will be computed
using an IRS formula. You are allowed to delay the first year's payment
until April 1 of the following year, but you will receive two years' worth
of payments in your 71 1/2 year if you choose to delay.
Q. Can I move funds from a qualified retirement plan to a Traditional
IRA?
A. If you are entitled to receive an eligible rollover distribution from
an employer's plan, you can continue deferring taxes by moving the money
into a Traditional IRA. The best way to do this is to inform the plan
administrator that you want the funds moved directly to your Traditional
IRA in a direct rollover. The plan administrator will inform you before
making an eligible rollover distribution.
Q. Can I move money from a Traditional IRA to a Roth IRA?
A. You can move money from your traditional IRA to a Roth IRA if your
adjusted gross income for the year is $105,000 or less, and you are either
single, or married and filing a joint tax return. In the year you convert,
you will have to pay federal income taxes on the amount that you move,
except the portion that is treated as the return of your Traditional IRA
basis. You may also be subject to state income taxes.
Q. What happens to my Traditional IRA after my death?
A. You may designate one or more beneficiaries to receive your IRA after
your death. If your spouse is your beneficiary, he or she may directly
transfer your Traditional IRA to his or her own IRA tax-free. In addition,
all beneficiaries have the option of taking a lump-sum payment or periodic
payments over a number of years. Any tax-deferred money in your Traditional
IRA at the time of death will be taxed when it is distributed to your
beneficiaries.
Not intended as tax advice. Please consult a tax professional.
© CUNA Mutual Group
