The parameters for eligibility, to open a traditional IRA, include everyone who has received compensation that has been deemed eligible and has not reached the age of 70 ½ by year’s end.
The eligible forms of compensation that have been specified by the IRS for contributing to an IRA are:
- Job salary, wages, commission payments, tips and bonus payments
- Income earned from self-employment
- Received payments from Alimony awards
- Combat pay (non-taxable)
The types of payments that are not eligible for IRA retirement plan compensation are:
- Annuity income
- Child support
- Capital gains, interest and dividend income
Contribution Limit to Traditional IRA
IRA holders are allowed to invest tax-deductible contributions that total a maximum of the lesser of $5,500, for an individual investment ( $11,000 total for a couple), or the total (100%) earned income for the taxation year.
Those who are 50 or older are given the chance of making extra contributions that will allow them to catch-up on their traditional IRA limits. As of now, the maximum is $1,000 for those catch-up payments. That additional amount is authorized to be placed within either a Roth IRA or a traditional IRA retirement account.
The primary feature of a Traditional IRA retirement account is that it may be tax deductible.
In the case of investors, who are covered by tax-deductible employer plans, their traditional IRA contribution’s tax-deductibility is lowered when a certain income level has been exceeded:
|2016 Tax Year|
|Married Filing Jointly or Qualified Widow (er)||$98,000 and $118,000|
|Married Filing Jointly (and you were not covered by an employee-sponsored retirement plan, but your spouse was)||$183,000 and 193,000|
|Single, Head of Household or Married Filing Separately (and you did not live with your spouse)||$61,000 and $71,000|
|Married Filing Separately (and you lived with your spouse at any time during the year)||$0 and $10,000|
The lower number is an annual income level at which the taxpayer is allowed to deduct the entire maximum contribution. The upper number represents the annual earnings level as of which the taxpayer is not allowed to deduct at all. If the income is in the range, then the deduction is reduced proportionally.
When an investor withdraws funds from either contributions, income earned or capital gains made, they will be taxable.
While an investor is allowed to contribute after-tax dollars to their traditional IRA accounts, the investor’s withdrawals of after-tax contributions are not subject to being taxed. The earnings on those contributions, though, are subject to being taxed.
For Traditional IRA distributions, there is a stipulation that they may start after the investor reaching the age of 59 ½. and must start by the first of April (April 1) of the next year that follows the year that the investor has reached the age of 70 ½.
Once the investor has reached the age of 70 ½, there is a penalty tax (10%) on withdrawals that are below the required minimum distribution (RMDs).
In addition, there is also a penalty tax (10%) on early distributions prior to the investor reaching the age of 59 ½.
However, this penalty is not assessed on withdrawals that are related to death, qualified education expenses (for an immediate member of the family), up to $10,000 for a first-time home buyer or certain stipulated medical costs that have exceeded 7.5% of the investor’s adjusted gross income (AGI).
An additional penalty tax (6%) is assessed on annual IRA contributions that have exceeded the maximum level allowed and have not been removed by the date of the contributor’s filed tax return (but not later than April 15).