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Home > Personal Banking > Retirement Services > A Guide to Traditional IRAs
  • A Guide to Traditional IRAs

    With this account, your earnings and deductible contributions grow tax-deferred. This means that you don't pay income taxes until you begin taking withdrawals after you retire.

    The Basics of Traditional IRAs

    • Can be opened and funded without any employer participation
    • Offer immediate tax benefits
    • Provide accessibility, with funds always available; however, withdrawals made prior to age 59½ may be subject to an additional 10% IRS penalty
    • Flexible because there is not a minimum contribution requirement and you can choose your own investments and financial institution

    You Can Contribute:

    • If you are under age 70½
    • If you have earned income from employment
    • Up to a maximum of $5,000 per year ($10,000 for couples); individuals age 50 and over can contribute up to a maximum of $6,000

    The Difference Between a Traditional IRA and Roth IRA

    Who Is It For?

    • TRADITIONAL IRA: For individuals under age 70½ who have earned income.
    • ROTH IRA: For individuals of any age with earned income and adjusted gross income below $132,000 (single) or $194,000 (joint). However, the amount you are allowed to contribute each year does decline once you reach adjusted gross income over $117,000 (single) and $184,000 (joint). 

    Is It Tax-Deferred or Tax-Free?

    • TRADITIONAL IRA: A tax-deferred investment with a possible tax deduction if you do not have an employer-sponsored retirement plan or if your income is below certain levels.
    • ROTH IRA: A tax advantage which is tax-free investment growth if the account has been open for five years or more and meets the qualified distribution rule. There are no tax deductions for contributions, but tax-free growth on compounded interest replaces this benefit.

    What Is The Income Tax Impact?

    • TRADITIONAL IRA: Income tax is due on all withdrawals, and withdrawals made prior to age 59½ may be subject to an additional 10 percent IRS penalty.
    • ROTH IRA: The investor's contributions to the account may be withdrawn at any time. But to qualify for tax-free withdrawal of investment earnings, the account must be open for at least five years and the account owner must be at least 59½ or purchasing a first home. (Under the new laws, even if you've previously owned a home, you may still qualify as a first-time home buyer). After the account has been open five years, death or disability also qualify for tax-free withdrawal of earnings. 

    Is There An Age Limit On Distributions?

    • TRADITIONAL IRA: Distributions must start by age 70½
    • ROTH IRA: There is NO requirement to begin withdrawals at age 70½

    Increased Portability Between Plans

    There is increased "portability" between retirement plans, allowing movement of money between Qualified Retirement Plans and Individual Retirement Accounts. For example: Money can be moved from an employee's 457 plan (i.e., PEBSCO) or 403(b) plan into a Traditional IRA.

    Are All Traditional IRAs Contributions Tax Deductible?

    Yes, if:

    • The individual is not an active participant under an employer's retirement plan or
    • During 2012, the individual earned no more than $92,000 if married and filed jointly, or $58,000 if filing singly.

    For those who participate in an employer plan, Traditional IRA deductibility is gradually phased out above these income levels.


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