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What is a Traditional IRA and how does it work?

Updated: Oct 4




A Traditional IRA is an individual retirement account (IRA) that allows you to contribute pre-tax dollars that can grow tax-deferred. Withdrawals are taxed as ordinary income. The idea is to give people the opportunity to relieve some tax liability during their working years and defer it until retirement, when they are generally in a lower tax bracket.


Who is eligible to contribute to a Traditional IRA?


In order to be eligible to contribute to a Traditional IRA, you must meet the following criteria:

- Have earned income (typically compensation from employment or self-employment).

- No age restriction.


How much can I contribute to a Traditional IRA?


You can contribute up to the lesser of 1) $6,000 or 2) earned income.


If you are age 50 or older at the end of the year, you can contribute the lesser of 1) $7,000 or 2) earned income.


What are Traditional IRA income limits and do I get a tax break by contributing to a Traditional IRA?


Traditional IRA contributions are not limited based on income. However, the ability to claim a deduction for contributions is governed by coverage of an employer retirement plan.


If you are not eligible to deduct the contributions, you would report your contributions as non-deductible contributions on Form 8606. These contributions would not be taxable when withdrawn, but special attention must be taken to track non-deductible contributions and perform the necessary calculations at the time of withdrawal to show the portion which is nontaxable.


If an individual is covered by an employer retirement plan, the deduction phase-out ranges for 2022 are:

$68,000 to $78,000 - Single taxpayers and heads of household

$109,000 to $129,000- Married, filing jointly

$0 to $10,000 - Married, filing separately


If an individual is not covered by an employer retirement plan, but their spouse is, the deduction phase-out ranges for 2022 are:

No limitation - Single taxpayers and heads of household

$204,000 to $214,000- Married, filing jointly

$0 to $10,000 - Married, filing separately


When are Traditional IRA contributions made?


Contributions must be made by the due date of the return, not including extensions. For 2022 contributions, this is April 17, 2023.


Can I have a 401(k) and a Traditional IRA?


Yes, but there is an impact on deduction eligibility based on if you are covered by an employer retirement plan as indicated above.


How do I withdraw contributions from a Traditional IRA?


Withdrawals of funds will be taxable as ordinary income (except to the extent that basis is involved).


See below for details of avoiding the 10% early withdrawal penalty.


Am I required to withdraw funds from a Traditional IRA?


Required minimum distributions must begin by April 1 of the year following the year the account owner turns age 72.


When are Traditional IRAs subject to penalties?


A 6% penalty applies on excess contributions. It is important to track annual contributions to ensure you do not exceed the $6,000 / $7,000 contribution limits outlined above.


A 10% early-distribution penalty applies unless one of the following applies:

- When the IRA owner is at least age 59 ½.

- After becoming disabled.

- To a beneficiary of a deceased IRA owner.

- Substantially equal periodic payments.

- To the extent the taxpayer has unreimbursed medical expenses exceeding 7.5% of his AGI.

- For the birth or adoption of a child (up to $5,000 per child).

- Made to certain unemployed individuals to the extent of the cost of their health insurance premiums.

- To the extent the taxpayer has qualified higher education expenses.

- Used to buy, build or rebuild a first home (up to $10,000 lifetime limit).

- Resulting from and IRS levy on the account.

- Made to certain military personnel.

- Up to $100,000 for a qualified disaster.

- Coronavirus-related distributions.


Can I rollover or convert my Traditional IRA?


IRA funds may be rolled into another IRA or employer retirement plan subject to certain conditions.


IRA funds may also be converted to a Roth IRA. Generally, the conversion is subject to income tax but is not subject to the 10% early withdrawal penalty.


This post may not contain a complete analysis of the tax issues discussed herein and does not represent official conclusions or advice regarding the matter. The information in this post is relevant for the 2022 tax year as of the date published and may not be updated for future tax years.

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