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Traditional IRAs
Consider a deductible IRA if...
- You don't have a retirement plan at work.
- You have a retirement plan at work, but your adjusted gross income qualifies for a full or partial IRA deduction.
- You expect your tax rate to significantly decline at retirement.
- Your income exceeds Roth IRA limits.
A Traditional IRA provides you with many advantages, including tax-deferred compounding of your investment earnings and the potential for deductible contributions.
Investor profile:
- If you have earned income and won't reach age 70 1/2 on or before December 31 of this year, you can open a Traditional IRA.
- If you are married, you and your spouse each may contribute to an IRA, even if only one of you has earned income.
Annual contribution limit:
- $5,000 ($10,000 for couples filing jointly) or 100% of earned income, whichever is less.
- $6,000 if you were age 50 or older before 2009 or 100% of earned income, whichever is less, can be contributed to your traditional IRA for 2008 .
- No contributions after age 70 1/2.
Deductibility:
You may deduct all or part of your contributions to a Traditional IRA if you:
- Are not eligible to participate in an employer-sponsored plan, such as a 401(k) or pension plan.
- Participate in a retirement plan at work, but have income below a certain level.
Withdrawals:
You can take withdrawals from a Traditional IRA at any time and pay current regular income tax. However, withdrawals prior to age 59 1/2 may be subject to a 10% early withdrawal penalty, except in certain circumstances such as disability or death, or when the money is used for:
- A first-time home purchase for yourself, your spouse, children, grandchildren, parents, ancestors, or your spouse's ancestors, subject to a $10,000 lifetime limit.
- Qualified higher education expenses, such as tuition, room and board, books, and other supplies.
- Deductible medical expenses greater than 7.5% of adjusted gross income.
- Health insurance premiums, if you qualify as unemployed.
Once you reach age 59 1/2, you can take money out of a Traditional IRA without penalty. Withdrawals must begin once you reach age 70 1/2.
If you're not eligible for a deductible Traditional IRA or a Roth IRA consider making contributions to a nondeductible Traditional IRA. Even without the tax deduction, your investment earnings can still grow faster in a tax-deferred IRA than in a taxable account.
Are your IRA contributions deductible?
| Filing Status |
Eligible to participate in a retirement plan at work?1
|
Modified adjusted gross income2
|
Tax deductibility |
| Single |
No |
No limits
|
Full amount, up to $5,000 per year or 100% of earned income, whichever is less |
| Single |
Yes |
Up to $52,000
$52,000-$62,000
$62,000 or more
|
Full amount
Partial
No Deduction
|
| Married |
No |
Any amount
|
Full amount
|
| Married filing joint return |
Yes |
2008
Up to $83,000
$83,000-$103,000
$103,000 or more
|
Full amount
Partial
No Deduction
|
- If you are unsure
of your participation status, refer to the pension plan box on your
W-2 form.
- Modified adjusted
gross income is determined before reduction for any deductible contributions
to an IRA. Income limits will increase each year.
- If neither you
nor your spouse participates in an employer-sponsored plan, you can
each make a fully deductible contribution of up to $4,000, provided
your combined contributions do not exceed your combined compensation.
IRS Circular 230 disclosure: Commerce Bank does not provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code, and was written to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of Commerce Bank should obtain their own independent tax advice based on their particular circumstances.
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