Traditional Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) is a personal savings plan that offers tax advantages for individuals to set aside money for retirement. Please see Benefits of a Self-Directed Individual Retirement Account (IRA). In this section, we will answer some frequently asked questions about the Traditional IRA. (Also see our chart self-directed Traditional IRA vs. self-directed Roth IRA.) For a more detailed look into the rules and regulations for Traditional IRAs, please see IRS Publication 590.
- Who is eligible for a self-directed Traditional IRA?
- How is compensation defined?
- How much can be contributed to a self-directed Traditional IRA?
- Can I make contributions to a Traditional IRA for my non-working spouse?
- Do I receive a deduction for contributions made to a Traditional IRA?
- Do I pay taxes on earnings in my Traditional IRA?
- When can I withdraw funds from my Traditional IRA without incurring any penalties?
- Are there exceptions for premature distributions?
- Am I required to take distributions from my Traditional IRA?
- What happens to my Traditional IRA in the event of my death?
- When is the contribution deadline for funding a Traditional IRA?
- How do I open a self-directed Traditional IRA at Equity Trust Company?
- How do I transfer funds from another IRA, Qualified Retirement Plan, or Tax-Sheltered Annuity to Equity Trust?
Who is eligible for a self-directed Traditional IRA?
Anyone who is under the age of 70 1/2 and has earned income is eligible for a self-directed Traditional IRA. A self-directed IRA can be established even if an individual already participates in any type of government plan, a 403(b), a tax-sheltered annuity, simplified employee pension plan (SEP), savings incentive match plan for small employers (SIMPLE), Individual(k) plan or a qualified pension or profit-sharing plan established by an employer.
How is compensation defined?
Compensation is defined as the wages, salaries, commissions, bonus, alimony and any other amount that you receive for providing personal services. For individuals who are self-employed, sole proprietors and partners in a partnership, "earned income" is another term for compensation. Passive income such as interest, dividends and most rental income are not considered compensation for the purpose of funding IRA. For more information, please see IRS Publication 590.
How much can be contributed to a self-directed Traditional IRA?
For 2007, the maximum contribution is $4,000 and for 2008, the maximum contribution is $5,000(plus an additional $1,000 "catch-up" contribution for those individuals age 50 years or older). The general contribution limit relative to IRAs will be raised to $5,000 in 2008. After 2008, this contribution limit will be indexed to inflation and increase in $500 increments.
Contributions may be made until April 15 for the immediately preceding tax year.
Can I make contributions to a Traditional IRA for my non-working spouse?
Yes. This is referred to as a spousal IRA. The spousal IRA allows a married person to make a self directed IRA contribution for his/her spouse. In order to make contributions to a spousal IRA you must file a joint return with your spouse. Your spouse need not have compensation or earned income in order to have contributions made to a spousal IRA. A couple can contribute up to 100% of their combined income or $8,000, whichever is less, for the 2007 tax year (plus an extra $1,000 per person under the "catch-up" contribution rules if both individuals are 50 years of age or older, thereby bringing the possible total contribution to $10,000).
Do I receive a deduction for contributions made to a Traditional IRA?
Yes. However there are certain deduction phase outs for those who are covered by other retirement plans. Any limit on deductions or the deduction phase-outs will not affect the generally applicable limit placed upon contributions to an IRA. For further information on the tax deduction limits, please see Table 1-2 and Table 1-3 of IRS Publication 590.
Do I pay taxes on earnings in my Traditional IRA?
Not right away. All earnings on your self-directed Traditional IRA contributions (deductible and/or non-deductible), as well as profits made on investments within the account, remain tax-deferred until you make withdrawals from the account.
To see for yourself the power of compound interest in a tax-deferred Traditional IRA account, please use the Equity Trust Self Directed IRA Wealth Calculator.
When can I withdraw funds from my Traditional IRA without incurring any penalties?
An individual can withdraw funds from a self-directed Traditional IRA without the 10% premature-distribution penalty any time after the age of 59 1/2.
Are there exceptions for premature distributions?
Yes. Some exceptions include:
- death;
- disability;
- education expenses;
- unreimbursed medical expenses that exceed 7.5% of your adjusted gross income;
- medical insurance premiums;
- expenses associated with buying or building a first home; and
- payment of any IRS levy
For a complete list of exemptions to the 59 1/2 premature distribution rule, please refer to IRS Publication 590.
Am I required to take distributions from my Traditional IRA?
Yes. When you reach the age of 70 1/2, you must begin to take the required minimum distributions (RMDs) no later than April 1 of the year following the year in which you attain age 70 1/2, or severe tax penalties will be imposed by the IRS.
What happens to my Traditional IRA in the event of my death?
Your named beneficiary(ies) will receive the entire proceeds of your self-directed Traditional IRA. The manner in which your beneficiary receives the funds is determined by the election made by your beneficiary(ies) within the guidelines of the law.
When is the contribution deadline for funding a Traditional IRA?
Traditional IRAs for the taxable year can be opened and/or funded any time between January 1 and the date your tax return is due for the year, excluding extensions. This due date is always April 15 of the following year.
How do I open a self directed Traditional IRA at Equity Trust ?
See instructions on how to open a self-directed Traditional IRA account at Equity Trust.
How do I transfer funds from another IRA, Qualified Retirement Plan, or Tax-Sheltered Annuity to Equity Trust ?
See instructions on transfer and rollover IRAs into an Equity Trust IRA.