Traditional IRA

One of the few opportunities to grow earnings that grow tax-deferred, a traditional IRA is a tax advantage.  You are not required to pay income taxes on deductible contributions to a traditional IRA, and you're not required to pay income taxes on the money a traditional IRA earns until you take withdrawals from your IRA.  In most cases, you wouldn't start withdrawing money from a traditional IRA until you retire (and find yourself in a lower tax bracket!)

IRA Tax Advantages

IRA contributions can be deducted from your gross income when filing your federal income tax returns in the year that you make the IRA contributions.  Any IRA earnings will accumulate tax-deferred, although when you withdraw the contributions and earnings, you will have to pay federal income tax.

IRA Qualifications & Requirements

In order to make an IRA contribution, you must not reach the age of 70.5 years during the year in which the contribution is made.  Another requirement for IRA contributions is that you have earned income in the year in which you contribute to a traditional IRA.

IRA Limits

The IRA limits for contribution maximums change annually.  For 2006 and 2007, you are able to make Traditional IRA contributions of the lesser amount- either $4,000 or a full 100% of your earned income.  Married couple IRA  contribution limits are $8,000 for the year, as long as at least one of you has earned at least that amount.

If you are over the age of 50, you can contribute a slightly greater amount annually.

IRA Contributions are made annually between January 1st and April 15th.

Details Regarding IRA Distribution

IRA distributions from a Traditional IRA can start at the age of 59.5 years without taxes and penalties (unless you have qualified exceptions for IRA withdrawals before that age).  IRA distributions can be made in a specific amount, given through payments, or as a lump sum.  The year the IRA distribution is made is the year the income is taxed.  You must begin taking IRA distributions when you turn 70.5 years of age if you haven't already.

Traditional IRA vs Roth IRA

Both the Traditional IRA and the Roth IRA are great opportunities for individuals and married couples to save for retirement, but they each have different advantages and disadvantages.  The primary difference between the Traditional IRA and the Roth IRA is how the government taxes each. 

If you made an IRA contribution of $2,000 in a Traditional IRA, you could use the contribution as a deduction from your income when filing your taxes.  If your income was $40,000, then you would actually only be paying tax on $38,000.  You could begin taking IRA distributions at the age of 59.6, but you would have to pay tax on dividends, interest, and earnings the IRA made over the years.

If you made an IRA contribution of $2,000 in a Roth IRA, there is no tax deduction.  However, if you wanted to withdraw money from the IRA, you can withdraw the principal at any age although you will pay a penalty if you withdraw any of the earnings the IRA has generated.  At the age of retirement, you can withdraw money from your Roth IRA completely tax free. 

To qualify for a Roth IRA, a single contributor must earn under $95,000 annually, and a married couple must earn under $150,000 annually.