Many people are now recognizing the importance of planning for retirement early in life. Whether you are young and hoping to create a secure future or you are nearing retirement age and want to give your funds a boost, opening a traditional IRA may be the right choice for you. What you need to understand are the benefits of this kind of retirement account and whether or not your contributions to it will be tax deductible. Like any other retirement plan, there are rules and restrictions you must be aware of before you make the decision to open one kind of account or another.
Anyone opening a traditional IRA must contribute less than the regular contribution limit or 100 percent of their earned income in one tax year. The year you turn 50, you can contribute additional funds as a catch-up contribution. The 2008 tax year had a regular contribution limit of $5,000. That same tax year had a catch-up limit of $1,000. The 2009 tax year is the same, and it may change or stay identical for the 2010 tax year, it cannot yet be said.
Determining whether you can receive a tax deduction from the funds you contribute to your traditional IRA is dependent upon your adjusted gross income, or AGI, your tax-filing status and whether you are considered an active participant on the account. For example, if you file your taxes as a single/head of household, you are active in the account, and you make $53,000 or less a year, you are eligible for a full tax deduction. If you fit in these categories but your income is between $53,000 and $63,000 a year, you can receive a partial deduction. If you make over this amount, you are not eligible for a tax break. Check online sources to find the category you fit into.
An IRA cannot be held jointly, though you can open an account even if you file your taxes with a spouse. You can only make a spousal IRA contribution if you file your taxes together. Once you turn 70½ years old, you can no longer make contributions to a traditional IRA. In fact, at that point minimum amounts must begin to be removed from the account and taxes paid. The limits and regulations set on traditional IRAs have changed every few years, so even if you come to a knowledge of the current rules, they may change in the future, so keep yourself informed.
