When you open a traditional individual retirement account (IRA), the money you contribute to the account is tax deductible, provided you meet certain income requirements. You will end up paying income tax on the amount you contributed, plus earnings, when it is time for you to take distributions from the IRA. A traditional IRA may be a worthwhile investment if you think your tax bracket will be lower when you retire than it currently is.
Locations and Types
Your traditional IRA can be opened with a bank, a mutual fund company or a brokerage. If you open a traditional IRA at a bank, you may want to start a certificate of deposit (CD) or money market account. Other options include investing in mutual funds or stocks. Depending on your level of experience with investing, you may want to have a professional pick the funds in which you invest. You can also choose the mutual funds to invest in yourself.
You can contribute $5,000 to a traditional IRA each year. A married couple who files jointly can contribute $5,000 per person. If you are over 50, you can contribute an extra $1,000 to a traditional IRA each year in the form of a catch-up contribution. If you also have a Roth IRA, the amount you can contribute to that account and a traditional IRA is capped at $5,000. You cannot put $5,000 in a Roth and $5,000 in a traditional IRA.
Age and Income Requirements
If you are over 70 1/2 years of age, you cannot open a traditional IRA. If you have a traditional IRA, you must begin to withdraw money from the account by April 1 of the year after you turn 70 1/2. You must also earn income during the year to contribute to or open a traditional IRA. The amount you can contribute to your traditional IRA cannot be more than the amount you earn in a year. For example, if you earned $4,000 in the year, you can only contribute up to $4,000.
Generally, you can deduct the amount you place in a traditional IRA from your income taxes. There are limits to the deduction, depending on your income and whether or not you have a retirement plan at your job. As of 2011, if you are single, earn more than $56,000 and have a retirement plan at work, the amount of your traditional IRA contribution that you can deduct is lowered. You will have to pay tax on any contributions you make to a traditional IRA that are above the deduction limit.
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