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The advantages of placing money in an IRA include:
• Tax-deferred earnings as long as the funds remain in your IRA.
• Depending on your income and on whether you or your spouse is covered by an employer’s retirement plan, some or all of your annual IRA contributions may be tax deductible.
Although IRAs carry tax advantages, they are subject to various tax rules, such as:
• A distribution from an IRA is taxed as ordinary income in the year in which you take the distribution (If you have made nondeductible contributions to your IRA, a portion of your distribution will be nontaxable).
• If you take a distribution from your IRA before you turn 59½, those funds will be subject to a 10% federal additional tax penalty unless an exception applies. Exceptions include withdrawals due to death or disability, qualified higher education expenses, first-time homebuyers ($10,000 limit), unreimbursed medical expenses that exceed 10% of income and certain unemployment-related expenses. Check with your tax advisor for more details.
• After you turn 70½, you must begin taking annual required minimum distributions from your IRA. The amount of each distribution is based on IRS life expectancy tables and your account balance.
A Traditional IRA might be right for you if:
• You are a taxpayer under age 70½ with earned income, or you are a non-working spouse
• Deductible contributions are more important to you than tax-exempt distributions
• You do not have another IRA or you want to split contributions between a Traditional IRA and a Roth IRA (the combined maximum allowed for the Traditional IRA and a Roth IRA is limited to $5,500 per year, or $6,500 for age 50 and over).
Your contribution to a Traditional IRA is fully tax deductible if:
• You and/or your spouse do not participate in your employer-sponsored retirement plan at work
• You do participate in an employer-sponsored retirement plan and your modified adjusted gross income is under $61,000 as a single taxpayer or $98,000 as married taxpayers filing jointly
• You are not covered by an employer’s retirement plan, but your spouse is, and your joint modified adjusted gross income is no more than $184,000
You don’t pay taxes on earnings or pre-taxed dollars in your Traditional IRA until you begin receiving distributions. The required beginning date to receive distributions is no later than April 1 following the year in which you reach age 70½.
Withdrawals, penalties and fees for IRAs:
• Withdrawals with federal additional tax. If you make withdrawals before age 59½, these withdrawals may be subject to a 10% federal additional tax and possible state taxes. Bank penalties may apply for withdrawals from time deposits before maturity.
• Withdrawals without federal additional tax. Under certain conditions, withdrawals may not be subject to the 10% federal additional tax (for example, if you or a family member is buying a first home or going to college). However, the withdrawals are subject to ordinary income taxes. Bank penalties may apply for withdrawals from time deposits before maturity.
Rollover from an employer-sponsored retirement plan
A Traditional IRA is a good choice for individuals who are changing jobs or retiring and want to keep their retirement plan distribution invested and untouched by taxes. By making a direct rollover from your employer-sponsored plan, you avoid withholding taxes and penalties on the distribution, so more of your money keeps compounding tax-deferred.