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A traditional IRA is primarily a tax-deferred individual savings plan. Contributions are made up to a specified limit with the contribution tax deductible up to the phase-out limitation. Money invested and earned in a traditional IRA is subject to income taxes at the time of withdrawal. Withdrawals can be made without penalty once the age of 59 1/2 is reached and withdrawals are required once the age of 70 1/2 is reached.

The traditional IRA was created on September 2, 1974 when President Ford signed the Employment Retirement Income Security Act. Its purpose was to provide a means for employees without company pensions to save tax deferred money toward their retirement. Since then employees who already have company pensions can also contribute to an IRA account.

Contributions:

Contributions to a traditional IRA are tax-deductible. The maximun annual contribution limits are:

• Tax year 2007, $4000 for those under 50 and $5000 for those 50 and over


• Tax year 2008, $5000 for those under 50 and $6000 for those 50 and over

Married couples can each contribute to an IRA even if only one had a job for the year if the working spouse earns enough to cover the IRA contributions for both.

Deduction Phase-Out Rule:

For tax year 2007, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is phased out if your modified AGI is:

• Married couple filing jointly or certain widower(s)

More than $83,000 but less than $103,000


• Single or head of household

More than $52,000 but less than $62,000


• Married filing separately

Less than $10,000

If you file a joint return, and your spouse is covered by a retirement plan at work but you are not, your deduction is phased out if your modified AGI is more than $156,000 but less than $166,000. If your AGI is $166,000 or more, you cannot take a deduction for contributions to a traditional IRA.

• The deadline for making contributions to a traditional IRA for any taxable year is the same as the deadline for filing tax returns for that year.

Withdrawals:

Owners of traditional IRA accounts can start making penalty free withdrawals when they are 59 ½ years of age. Penalty free withdrawals are also allowed for certain hardships.

Penalties:

Prior to 59½ withdrawals made to traditional IRAs are subject to a penalty along with federal and state taxes. The amount of the IRA withdrawal will be added to income for that year and federal and state taxes will be based on that figure. Look at IRA Rollovers if there are plans to move an IRA account to make sure the move will not incur any penalty.

There are exceptions to the early withdrawal penalty. They are:

• Extreme medical expenses


• Health Insurance Premiums (in certain cases)


• First-time home buyers


• Certain expenses for higher education


• Death


• Equal distributions based on life expectancy

Penalties can be charged if a person waits too long to begin withdrawing the required IRA distributions. By the first of April following the year a person becomes 70 ½ years of age, yearly IRA distributions from your IRA must begin. The amount of these distributions are based on life expectancy and are calculated from a life expectancy chart. If at least the minimum amount isn't withdrawn, a 50 percent penalty will be charged on the amount that should have been withdrawn.