A Traditional IRA (also called a Simple IRA) is an individual retirement arrangement that allows you to save for retirement with tax-deferred earnings and the possibility of tax-deductible contributions. These tax advantages make the Traditional IRA a powerful tool in creating a balanced, long-term savings plan.
How does a Traditional IRA work?
You are eligible to contribute to a Traditional IRA as long as:
- You (or your spouse, if filing a joint tax return) earn compensation from employment
- You have not reached age 70½ before the end of the year
You may be eligible to deduct the amount of your contribution on your federal income tax return for the year. If your IRA investment earns interest, these earnings are tax-deferred and help increase your IRA balance. You can withdraw your assets at any time, but tax and penalties may apply, depending on your age and what type of assets you remove. Once you reach age 70½, however, you must remove a minimum amount from your Traditional IRA each year.
What does it cost to set up an IRA?
There is no fee.
How long does it take to set up an IRA?
It can be done in just a few minutes at any GFCU branch.
What paperwork will I need to set up an IRA?
You’ll need a driver’s license or other form of photo identification. If you’re rolling over an IRA from an existing plan or a former employer, there is another form you’ll need to complete.
What is a Rollover IRA? Can I roll my money into a Traditional IRA or a Roth IRA?
A rollover IRA is created when money from an employer sponsored retirement account, such as a 401K, is transferred to an IRA, often when an employee changes jobs or retires. You can rollover funds into a Roth IRA, but because contributions to a Roth IRA are taxed, you may be required to pay taxes.
Can I have more than one Traditional IRA? Can I have a Roth IRA and a Traditional IRA?
Yes. But your total contributions for the year for must be within the applicable limit.
Can I move my Traditional IRA assets into another retirement plan?
Yes. If the plan allows, you may roll over the pretax portion of your Traditional IRA to an eligible employer-sponsored retirement plan. You also may move Traditional IRA assets to a Roth IRA; this is called a conversion and requires you to include the pretax portion of your conversion in your taxable income for the year. Note that Traditional IRA assets cannot be moved into SIMPLE IRAs.
What happens to my Traditional IRA after my death?
You may designate one or more beneficiaries. If your spouse is your beneficiary, he or she may transfer or roll over your Traditional IRA to his or her own Traditional IRA. All beneficiaries have the option of taking a lump-sum payment or payments over a number of years. Any tax-deferred money in your Traditional IRA at the time of your death will be taxed as it is distributed to your beneficiaries.
How much may I contribute each year?
If you meet the eligibility requirements described above, you may contribute up to $5,500 ($6,500 if you are age 50 or older). You aren’t allowed to contribute more than you’ve earned. Contribution limits are subject to annual cost-of-living adjustments (COLAs).
What is the deadline for making Traditional IRA contributions each year?
It’s the due date for filing your federal income tax return, so for most people, April 15.
How do I know if I can deduct my Traditional IRA contribution?
One of the key benefits of contributing to a Traditional IRA is the potential for a tax deduction up front. You can deduct 100% of your contribution if you and your spouse are not active participants in employer-sponsored retirement plans.
If you or your spouse are participants in another retirement plan, your IRA deduction depends on your tax filing status and the amount of your modified adjusted gross income (MAGI). For 2015, you may deduct 100% of your contribution if you are an active participant filing a joint income tax return and your MAGI is $98,000 or less (for single filers, $61,000 or less). And if you are not an active participant but your spouse is, you can deduct the full contribution amount if your joint MAGI is $183,000 or less. You may want to seek competent tax advice when determining deductibility.
If you (or your spouse) are an active participant and your MAGI is over these limits, the amount of your IRA deduction is gradually phased out, meaning that you may be able to take only a partial deduction or no deduction at all. See the chart below for the current income limits. If you cannot take a deduction on your contribution, you can still make nondeductible contributions, and these are not taxed when you remove them later.
|Tax-Filing Status||Active Participant||Full Deduction||Partial Deduction||No Deduction Allowed|
|Single 2014||Yes||$60,000 or less||$60,000-$70,000||$70,000 or more|
|Single 2015||Yes||$61,000 or less||$61,000-$71,000||$71,000 or more|
|Married, Filing Jointly 2014||Yes||$96,000 or less||$96,000-$116,000||$116,000 or more|
|Married, Filing Jointly 2015||Yes||$98,000 or less||$98,000-$118,000||$118,000 or more|
|Married, Filing Jointly 2014||No, but spouse is||$181,000 or less||$181,000-$191,000||$191,000 or more|
|Married, Filing Jointly 2015||No, but spouse is||$183,000 or less||$183,000-$193,000||$193,000 or more|
Am I eligible for a tax credit for my Traditional IRA contribution?
Maybe. If your income falls within certain limits, you may qualify for the saver’s tax credit of up to $1,000. In addition, you must:
- Be at least 18 years of age at the close of the taxable year
- Not be eligible to be claimed as a dependent by another taxpayer
- Not be a full-time student.
See IRS Publication 590, Individual Retirement Arrangements (IRAs), or consult your tax advisor to find out if you are eligible for this credit.
Will I have to pay tax on the amount I withdraw from my Traditional IRA?
Generally, yes. You must include all pretax assets (deductible contributions and earnings) in your taxable income when you withdraw money from your Traditional IRA. If you have made any nondeductible contributions to a Traditional IRA or have rolled over nondeductible contributions from a retirement plan to your IRA, these will not be taxed and will serve as a portion of each distribution.
Can I withdraw money from my Traditional IRA at any time?
Unlike most other retirement plans, you can always withdraw money from your Traditional IRA. You may be subject to an IRS penalty tax if you withdraw from your IRA before you are age 59½, unless you meet certain penalty tax exceptions.
If I withdraw money before age 59 1/2, will I pay a penalty tax?
In general, you will pay a 10% penalty tax on taxable withdrawals you take before age 59½. The penalty tax does not apply however, if you qualify for one of the following exceptions:
- First-time homebuyer expenses
- Qualified higher education expenses
- Certain unreimbursed medical expenses
- Substantially equal periodic payments
- Health insurance premiums during unemployment
- IRS levy
- Qualified reservist distributions
Will I ever be required to withdraw money from my Traditional IRA?
Yes. Once you reach age 70½, the IRS you to take out a minimum amount each year. This amount is calculated based on your account balance and your age—you can always take more. If you don’t take the required minimum amount, you will be subject to an IRS penalty tax.