A traditional Individual Retirement Account (IRA) is a tax-advantaged savings account that is established and funded by an individual to accumulate retirement savings. A traditional IRA is generally funded through tax-deductible annual contributions and rollovers of pre-tax assets from other eligible retirement plans, such as 401(k) plans.
A traditional IRA is easy to establish and provides the account owner with flexibility and control over their contributions, investments, and distributions. Annual retirement savings contributions may be tax- deductible and investment earnings generally grow tax-deferred.
Anyone who has earned income can establish and contribute to a traditional IRA. Earned income is compensation you receive from working that includes wages, commissions, and self-employment income. You can have a traditional IRA even if you have a retirement plan with your current employer.
To establish a traditional IRA, you must sign an IRA plan agreement with an IRA custodian. Banks, life insurance companies, mutual fund companies, brokerage firms and other financial institutions can act as an IRA custodian. The IRA custodian will provide you with a copy of the plan agreement and a disclosure statement that explains the traditional IRA rules.
You can establish a traditional IRA at any time. If you want to make an annual contribution for this year, you have until your tax return deadline, generally April 15 of next year, to establish the IRA and make the contribution.
You can make an annual contribution of up to $6,000 (for 2020) or 100% of compensation, whichever is less. If you are age 50 or older, you may make an additional catch-up contribution of $1,000. The annual contribution limit applies to all of your traditional and Roth IRAs in aggregate.
You are not required to make a traditional IRA contribution each year and you can vary the amount you choose to contribute each year.
If neither you nor your spouse is covered by an employer-sponsored retirement plan, your entire contribution is tax-deductible. If either you or your spouse is covered by an employer-sponsored retirement plan, your deduction may be limited depending on your level of income.
You can transfer or rollover traditional IRA assets into another traditional IRA. Additionally, if you are eligible to take a distribution from your employer’s retirement plan, those assets can generally be rolled over into your traditional IRA. Assets that are rolled over or transferred will not be included in your taxable income.
You can take distributions from your IRA at any time. The distribution will typically be included in taxable income in the year of the distribution and may be subject to a 10% early distribution penalty if you are not yet age 59½.
You must begin taking a minimum payment from your traditional IRA each year starting with the year you attain age 72 (age 70½ if born before 7/1/1949). You have until April 1 of the year following the year you attained the required beginning age to take your first distribution. You must continue taking distributions by December 31 each year thereafter. Your beneficiaries will be required to continue taking distributions after your death.