The key benefits of traditional IRAs

If you choose a traditional IRA, your contributions may be
tax-deductible, while your savings grow and compound taxdeferred
until you withdraw them at retirement.

In certain situations, your entire contribution to a traditional
IRA can be tax deductible, meaning that you get to subtract
Chapter 3: Understanding Mutual Funds, 401(k)s, and IRAs 29
the amount that you contribute from your income, reducing
the amount of taxes you have to pay overall.

The rules for this tax benefit are as follows:
 If you’re single and don’t have an employer-sponsored
retirement plan, the full $
2,000 is deductible on your
income tax return.

 If you’re single and covered by an employer-sponsored
plan, you can contribute up to $2,000 and deduct the
full amount if your annual adjusted gross income is
$30,000 or less. (Annual adjusted gross income is defined
as your gross income, less certain allowed business-related
deductions.

Deductions include alimony payments, contributions
to a Keogh plan, and in some cases, contributions
to an IRA.) If your income is between $30,000
and $40,000, the deduction is prorated. If you make
more than $40,000, you can contribute, but you get no
deduction. These numbers gradually increase to $50,000
for taking the full deduction and to $60,000 for taking
no deduction, until the year 2005.

 If you’re married and file your tax returns jointly, you
have an employer-sponsored plan, and your annual
adjusted gross income is $50,000 or less, you can deduct
the full amount. The figure is prorated from $50,000 to
$60,000. After $60,000, you can’t take any deduction.
By 2007, the income allowances will increase to $80,000
for taking the full deduction and $100,000 for taking no
deduction.

 If your spouse doesn’t have a retirement plan at work,
and you file a joint tax return, the spouse can deduct his
or her full $2,000 contribution until your joint income
reaches $
150,000. After that, the deduction is prorated
until your joint income is $160,000, at which time you
can’t deduct the IRA contribution.


 Non-income earning spouses can also open IRAs, and
the annual contribution for a married couple filing
jointly is $4,000 or 100% of earned income, whichever
is less, with a $2,000 maximum contribution for each
spouse.

Funds generally can’t be taken from a traditional IRA before
age 591⁄2 without paying a penalty. If you take money out,
taxes and a 10% penalty are imposed on the taxable portion
of the distribution.

You can make some withdrawals without paying a penalty.
Money can be taken penalty-free if you use it for a first-time
home purchase or for higher education fees. You can also
withdraw penalty-free in the event of death or disability, or
if you incur some types of medical expenses.

After you turn age 701⁄2, you are required to take money from
your traditional IRA account, either in the form of a lumpsum
payout or a little at a time; withdrawing a little at a time
allows you to extend the benefit of the tax shelter.