Traditional IRA Summary
- Contributions to a Traditional IRA may be made for any year in which an individual had earned income and was not age 70 1/2 or older by year-end.
- A Traditional IRA can be funded using personal contributions, spousal contributions, transfers, and rollovers.
- Contributions are tax-deductible and grow tax free until distribution – at which point they are taxed as ordinary income.
- Traditional IRAs must be established with institutions that have received IRS approval, such as most banks, brokerages and savings institutions, and other qualified custodians.
- A Traditional IRA can be self-directed using a Self-Directed Traditional IRA, or SDIRA.
- For Checkbook-Control, a Traditional IRA can be combined with a Traditional IRA-LLC or Traditional IRA-Trust to create a Checkbook Traditional IRA.
- A Traditional IRA can be invested in stocks, bonds, mutual funds, real estate, private lending opportunities, cryptocurrency (Bitcoin, Ether, and all other crypto assets), tax-liens & tax-deeds, merchant cash advance, pre-settlement funding, life settlements, crowdfunded assets, and just about anything else.
- A Traditional IRA may not be invested in life insurance or collectibles.
Traditional IRA Detailed Overview
Contributions to a Traditional IRA
Individuals that had earned income for a year and did not reach age 70 1/2 by year-end can contribute to a Traditional IRA.
Contributions to a Traditional IRA are tax deductible and the earnings grow on a tax-deferred basis, allowing the account-holder to defer paying taxes until funds are distributed from the IRA. Annual contributions are limited to $5,500. Individuals who are age 50 and older by year-end can make additional catch-up contributions of up to $1,000, resulting in a total contribution of $6,500.
Traditional IRA Contributions for a particular year can be made at any time during the year or by the tax-filing due date for that year, not including extensions. For most people, this means that contributions must be made by April 15.
Rollovers and Transfers to a Traditional IRA
There are no age limitations or income requirements for transferring assets from another Traditional IRA, SEP-IRA, or SIMPLE-IRA, or for the purpose of a rollovers from Qualified Plans, 403(b), or governmental 457(b) plans.
Tax Deductibility of Contributions
Contributions to a Traditional IRA are tax-deductible, lowering current tax liability. However, the ability to deduct a Traditional IRA contribution may be impacted by the following:
- an individual’s tax-filing status
- an individual’s modified adjusted gross income (MAGI)
- an individual’s active-participant status in an employer retirement plan
You can contribute to a Traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your Traditional IRA contributions if you or your spouse participates in another retirement plan at work.
An individual is covered by an employer retirement plan for a tax year if his or her employer has a:
- Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;
- IRA-based plan (SEP, SARSEP or SIMPLE IRA plan) and you had an amount contributed to your IRA for the plan year that ends with or within the tax year; or
- Defined Benefit Plan and you are eligible to participate for the plan year ending with or within the tax year.
Box 13 on the Form W-2 you receive from your employer should contain a check in the “Retirement plan” box if you are covered. If you are still not certain, check with your (or your spouse’s) employer.
The limits on the amount you can deduct don’t affect the amount you can contribute and non-deductible contributions will grow on a tax-deferred basis.
Tax Deductibility if You Are Covered by a Retirement Plan at Work
For 2016, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:
- More than $98,000 but less than $118,000 for a married couple filing a joint return or a qualifying widow(er),
- More than $61,000 but less than $71,000 for a single individual or head of household, or
- Less than $10,000 for a married individual filing a separate return.
Tax Deductibility if Your Spouse is Covered by a Retirement Plan at Work
If you are married and your spouse is covered by a retirement plan at work and you are not, and you live with your spouse or file a joint return, your deduction is phased out if your modified AGI is more than $184,000 (up from $183,000 for 2015) but less than $194,000 (up from $193,000 for 2015).
Traditional IRA Funding Methods
A Traditional IRA can be funded by several sources:
- Pre-tax contributions
- After-tax contributions
- Spousal IRA contributions
A recharacterization allows you to “undo” or “reverse” a rollover or conversion to a Roth IRA. You generally tell the trustee of the financial institution holding your Roth IRA to transfer the amount to a traditional IRA (in a trustee-to-trustee or within the same trustee). If you do this by the due date for your tax return (including extensions), you can treat the contribution as made to the traditional IRA for that year (effectively ignoring the Roth IRA contribution).
You can recharacterize your rollover or conversion by October 15 of the following year, regardless of whether you requested an extension to file your tax return.
Required Minimum Distributions for Traditional IRAs
Traditional IRA distributions cannot be deferred indefinitely. An IRA owner must begin required minimum distributions (RMDs) on April 1 of the year following the calendar year in which age 70 ½ is reached. For each subsequent year after the required beginning date, RMDs must be withdrawn by December 31. You can withdraw more than the minimum required amount, if you choose to.