All About Traditional IRAs

IRA stands for Individual Retirement Account and is of two types namely Roth IRA and Traditional IRA. There is a big difference between these two guys and as a regular taxpayer and good citizen of the country you definitely expect the best service. Therefore, it is very important to know what IRA is all about.

In this article, you’ll learn more about traditional IRAs.

In a traditional IRA, your investment earnings are allowed to grow tax-deferred until you finally withdraw them at retirement. In general, if you received alimony or earned income, you can set up one or more IRAs a year earlier when you turn seventy-one-half. However, your total contribution must not exceed the pre-established limits.

For those who participate in profit-sharing, qualified pension, and retirement plans, you can also get a traditional IRA. Contributions from active participants to qualified pensions are not tax deductible and this depends on your filing status as well as your income.

Many people prefer traditional IRAs because of their advantages. Two of its clear advantages are:

o Deductibility of potential contribution

o Current taxes on investment gains are deferred

There are also rules you must follow if you have a Traditional IRA, and this is true with Roth IRAs as well. Be very particular with the rules followed about contribution limits. If you are married, as a couple you can contribute a maximum of $8,000 (for 2006; $4,000 each) or all of your earned income each year. If only one of you has a job, you can still contribute that amount. The rules apply to both types of IRAs and regardless of the amount of IRA the couple has. All of your contributions must not exceed this limit.

Last year (2006), IRA account holders age 50 and older became eligible to make catch-up contributions of $1,000. Like the first rule about annual contributions, this additional rule about catch-up contributions also applies if you have only one IRA account or if you have multiple accounts.

Some employers do not support or sponsor retirement plans for their employees. And if this is the case, you can automatically deduct your IRA contributions according to the precise limit. And for those with employer-sponsored plans, you may find it difficult to deduct all of your traditional IRA contributions, and the amount you can deduct will often depend on your income.

What if you need to change jobs? Well, you don’t have to worry because you can move your retirement plan assets and this will be even easier if your former employer allows it. With your former employer’s permission, you can withdraw your retirement money and then roll it over to a traditional IRA. Another option is to move your retirement plan to a so-called rollover IRA; This move will allow you to avoid income tax on the current distribution.

There are other rules you must follow, such as rules about IRA withdrawals and other important matters. You must strictly follow the rules in order to expect a stable financial future. Many people worry about retirement, but if you have a Traditional IRA, rest assured that you can have a brighter future after retirement.