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February 15, 2009

Traditional IRA

Your Guide

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Definition

  • An individual retirement account, which can be established at a bank, credit union, brokerage firm, savings & loan, or other financial institution that satisfies the requirements established under the tax code IRC § 408(n)
  • An individual retirement annuity-contract issued by an insurance company.

An individual is eligible to take a tax deduction for contributions made to his/her traditional IRA, if he/she is not an active participant, nor married to someone who is an active participant.

If an individual is an active participant and/or married to someone who is an active participant, his/her eligibility to take a tax deduction for the traditional IRA contribution is determined by his/her modified adjusted gross income (MAGI) and tax filing status. The MAGI limits can be found here under the definition of IRA

An individual who is eligible to claim a tax deduction for his/her traditional IRA contribution may choose to treat the contribution as nondeductible, if he/she so wishes to do.  IRS Form 8606 is required to be filed to report any nondeductible contributions made to a traditional IRA. This helps the IRA owner and the IRS keep track of these amounts, so that they are not taxed when distributed from the IRA.

Referring Cite

IRC § 408 (a), IRS Publication 590

Additional Helpful Information

Individuals may contribute up to 100% of their taxable compensation/income up to the dollar limit that is in effect for the year to their traditional and/or Roth IRAs. Individuals who reach age 50 by the end of the year may contribute additional amounts referred to as ‘Catch-up’ contributions.

    • An individual can split the annual limit between a traditional and a Roth IRA, or contribute the entire amount to either. However, MAGI limitations apply to Roth IRA contributions.
    • IRA contributions must be made in cash

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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Keep Learning

Salary Deferral Contribution

Definition A contribution made pursuant to a participant’s election to have a portion of his/her salary/wages  contributed to his/ her employer sponsored plan  rather than

Annual Addition Limit

Definition The annual Addition limit is the maximum amount that may be added to a defined contribution plan on behalf of a participant for any

Deduction

Definition A deduction is a Tax write-off which is allowed for contributions to traditional IRAs or employer sponsored plans. Individuals who are active participants are

Excess deferral

Definition Salary deferral contributions, contributions are limited to the lesser of the IRC § 402(g) limit or 100% of compensation. Salary deferral contributions in excess

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