Contents
An Overview of Retirement Plans
Retirement Plan Terminology
401(k) Retirement Plans
403(b) Retirement Plans
457(b) Retirement Plans
Traditional IRAs
Roth IRAs
SEP IRA and SIMPLE IRA Plans
Rollover IRAs
How to Manage Your Retirement Plan
How to Consolidate Different Retirement Plans
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Traditional IRAs
Traditional Individual Retirement Accounts, called Traditional IRAs (or often just IRAs for short), are retirement plans that you can set up on your own, even if you participate in other, employer-sponsored retirement accounts.
How Traditional IRAs Work
Unlike 401(k)s, 403(b)s, and 457(b)s, traditional IRAs are retirement accounts that you set up directly with a bank, a financial services firm, or an insurance company. Even though they’re not tied to your employer, they do have various contribution limits based on your annual income. Here’s a quick breakdown of how they work:
- You set up an IRA account: The setup process usually involves filling out a few simple forms and providing an initial deposit of $500–1,000, though some IRAs have initial deposit requirements of $25 or less.
- You make contributions: You can contribute to your account at any time during the year up to the allowable limit and before the annual contribution deadline. Certain contributions can be tax deductible, though restrictions apply (see Key Traits of Traditional IRAs).
- Your investments grow tax deferred: You don’t pay taxes on investment gains until you withdraw your assets, either after age 59 1/2 or for certain qualified exceptions.
- You withdraw your money after age 59 1/2: Any investment gains that you withdraw after age 59 1/2 are subject to income tax based on your tax bracket at the time at which you make the withdrawals.
Key Traits of Traditional IRAs
Trait |
Guidelines |
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Tax benefits |
Contributions are tax deductible unless you’re eligible to enroll in an employer-sponsored retirement plan and your income exceeds $50,000–60,000 (for single filers) or $80,000–100,000 (for married couples filing jointly). If you have income within these ranges, you may qualify for a reduced deduction. If you’re not eligible for an employer-sponsored plan, you can deduct your IRA contributions regardless of your income level. Once you make contributions, they grow tax deferred until withdrawal, when taxes become due. |
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Eligibility |
If you’re under age 70 1/2, you can set up a Traditional IRA as long as you have enough earned income that year to meet the minimum initial contribution requirement. |
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Vesting |
All contributions vest immediately. |
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Enrollment deadlines |
A Traditional IRA for a given year must be set up by April 15 of the next year. For example, you have until April 15, 2009, to set up an IRA for 2008. |
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Contribution deadlines |
All contributions to an IRA for a given year must be made by April 15 of the next year. For example, you have until April 15, 2009, to make all of your contributions to an IRA for 2008. |
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Contribution limits |
Up to $5,000 per year or, if you’re age 50 or older, up to $6,000. Starting in 2009, these limits will increase incrementally depending on the inflation rate. |
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Contribution sources |
Earned income (salary, commissions, other work-related sources, alimony). |
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Withdrawal penalties |
A 10% penalty applies to withdrawals made prior to age 59 1/2. Exceptions include death, disability, higher education expenses, and the purchase of a first home. |
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Transfers |
Most plans can be transferred to other Traditional IRAs or other (pretax) retirement plans. |
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Borrowing |
Loans from IRA accounts are not permitted. |
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Beneficiaries |
You can designate both primary and contingent beneficiaries. |
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Required minimum distributions |
After 70 1/2, you’re required to begin withdrawing certain minimum annual amounts as of April 1 of the year after you turn 70 1/2. |
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Fees and minimums |
Annual fees range from $0–50. Minimums range from $0–25, depending on the plan provider. |
| Acknowledgments & Disclaimer |
