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Traditional IRA
What is a traditional IRA?
A traditional IRA is any IRA that is not a Roth, SIMPLE, or Coverdell
Educational Savings Account.
( See
IRC408 ,408a and530 )
A traditional IRA may be opened by any individual who has earned income, and
wishes to defer or eliminate the payment of taxes on income on funds set
aside for retirement. Contributions to traditional IRAs may not be made if
you are 70½ years of age, or over.
If you are eligible to contribute to your IRA, the amount of the contribution
for which you may take a tax deduction will depend upon whether you (or, in
some cases, your spouse) are an active participant in an employer-maintained
retirement plan. If you (and you spouse, if married) are not an active
participant, your entire IRA contribution will be deductible. If you are an
active participant (or are married to an active participant), the
deductibility of your contribution will depend on your modified adjusted
gross income (MAGI) and your tax filing status for the tax year for which the
contribution was made. MAGIis determined on your
income tax return using your adjusted gross income but disregarding any
deductible IRA contribution.
Definition of Active Participant - Generally, you will be an active
participant if you are covered by one or more of the following
employer-maintained retirement plans:
- a qualified pension, profit
sharing, 401(k), or stock bonus plan;
- a qualified annuity plan of
an employer;
- a simplified employee pension
(SEP) plan;
- a retirement plan established
by the federal government, a state, or a political subdivision (except
certain unfunded deferred compensation plans under Code section 457);
- a tax-sheltered annuity for
employees of certain tax-exempt organizations or public schools;
- a plan meeting the
requirements of Code section 501(c)(18);
- a qualified plan for
self-employed individuals (H.R. 10 or Keogh Plan);and
- asavings incentive match plan
for employees of small employers (SIMPLE) IRA plan or a SIMPLE 401(k)
plan.
If you do not know whether your employer maintains one of these
plans, or whether you are an active participant in it, check with your
employer or your tax advisor. Also, the IRS Form W-2, Wage and Tax Statement
that you receive at the end of the year from your employer will indicate
whether you are an active participant.
If you are an active participant and are single, the deductible amount of
your contribution is determined as follows: (1) begin with the appropriate
phase-out range maximum for the applicable year (specified below), and
subtract your MAGI; (2) divide this total by the difference between the
phase-out maximum and minimum; (3) multiply this number by the maximum
allowable contribution for the applicable year, including catch-up
contributions if you are age 50 or older. The resulting figure will be the
maximum IRA deduction you may take. For example, if you are age 30 with MAGI
of $42,000 in 2003, your maximum deductible contribution is $2,400 (the 2003
phase-out range maximum of $50,000 minus your MAGI of $42,000, divided by the
difference between the maximum and minimum phase-out range limits of $10,000
and multiply by the contribution limit of $3,000.)
If you are an active participant, are married and you file a joint income tax
return, the deductible amount of your contribution is determined as follows:
(1) begin with the appropriate phase-out maximum for the applicable year
(specified below), and subtract your MAGI range; (2) divide this total by the
difference between the phase-out range maximum and minimum; (3) multiply this
number by the maximum allowable contribution for the applicable year,
including catch-up contributions if you are age 50 or older. The resulting
figure will be the maximum IRA deduction you may take. For example, if you
are age 30 with MAGI of $62,000 in 2002, your maximum deductible contribution
is $2,400 (the 2003 phase-out maximum of $70,000 minus your MAGI of $62,000,
divided by the difference between the maximum and minimum phase-out limits of
$10,000 and multiplied by the contribution limit of $3,000.)
If you are an active participant, are married and youfile
a separate income tax return, your MAGI phase-out range is generally $0 -
$10,000. However, if you lived apart for the entire tax year, you are treated
as a single filer.
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Tax Year
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JointFilers
Phase-out Range
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SingleTaxpayers
Phase-out Range
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(minimum)(maximum)
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(minimum)(maximum)
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2002
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$54,000 - $64,000
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$34,000 - $44,000
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2003
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$60,000 - $70,000
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$40,000 - $50,000
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2004
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$65,000 - $75,000
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$45,000 - $55,000
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2005
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$70,000 - $80,000
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$50,000 - $60,000
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2006
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$75,000 - $85,000
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$50,000 - $60,000
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2007
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$80,000 - $100,000
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$50,000 - $60,000
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If you are not an active participant in an employer-maintained
retirement plan, are married to someone who is an active participant, and you
file a joint income tax return, your maximum deductible contribution is
determined as follows: (1) begin with $160,000 and subtract your MAGI; (2)
divide this total by $10,000; (3) multiply this number by the maximum
allowable contribution for the applicable year, including catch-up
contributions if you are age 50 or older. The resulting figure will be the
maximum IRA deduction you may take.
You must round the resulting deduction to the next highest $10 if the number
is not a multiple of 10. If your resulting deduction is between $0 and $200
you may round up to $200.
You must round the resulting deduction to the next highest $10 if the number
is not a multiple of 10. If your resulting deduction is between $0 and $200
you may round up to $200.
Beginning in 2002, contribution limits have increased to $3,000, and catch-up
contributions are available to person age 50 and over. (SEE TABLE)
Distributions may be taken after attaining age 59½ without penalty.
Distributions may also be penalty free before age 59½ if made on account of
death, disability, certain higher education expenses, and first time home
purchases and for several other exceptions. The distributions are taxed otherwise
as ordinary income.
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