Traditional IRAs may be a good choice if you are seeking a tax deduction, your income is too high to be eligible for a Roth IRA, or you believe you will be in a lower tax bracket in retirement. A Traditional IRA is your opportunity to make tax-deferred and possibly tax-deductible contributions to your retirement savings.
The benefits of a Traditional IRA include:
- Tax-deferred growth
- The ability to deduct your contributions (if you participate in a plan at work, your eligibility is based on your income)
- Accepts rollovers from employer-based plans (401(k), 403(b), or 457 governmental plans)
- Accepts transfers of savings from other Traditional IRAs
Things to consider:
- Withdrawals are taxable and included with your yearly income
- 10% IRS early withdrawal penalty on distributions taken before age 59 1/2 (some exceptions apply)
- Required Minimum Distributions (RMDs) at age 70 1/2
Learn more about IRAs
Individuals under age 70 1/2 with earned income are eligible to make IRA contributions. With a Traditional IRA, you may be able to deduct your contributions on your taxes, which can help lower your tax bill. Your eligibility to deduct is based on your Modified Adjusted Gross Income (MAGI) and whether you participate in a retirement plan at work.
You can contribute up to $5,500 for the maximum IRA contribution in 2014 and 2015. If you’re over age 50, you can make an additional catch-up contribution of $1,000 over the normal IRA limits.
The tables below can help you determine whether your IRA contribution is deductible. Our IRA eligibility calculator can also help determine how much you can contribute.
The IRS provides guidelines about claiming a tax deduction for your Traditional IRA contributions. If you are covered by a retirement plan at work, here is a summary of guidelines and maximum annual contributions:
During the 2014 tax year:
- Fully deductible if MAGI is less than $60,000 (single) or $96,000 (joint)
- Partially deductible if MAGI is between $60,000 and $70,000 (single) or $96,000 and $116,000 (joint)
- No deduction if MAGI is over $70,000 (single) or $116,000 (joint)
During the 2014 tax year, the spouse without earned income:
- Fully deductible if MAGI is less than $181,000 (joint)
- Partially deductible if MAGI is between $181,000 and $191,000 (joint)
- No deduction if MAGI is over $191,000
During the 2015 tax year:
- Fully deductible if MAGI is less than $61,000 (single) or $98,000 (joint)
- Partially deductible if MAGI is between $61,000 and $71,000 (single) or $98,000 and $118,000 (joint)
- No deduction if MAGI is over $71,000 (single) or $118,000 (joint)
During the 2015 tax year, the spouse without earned income:
- Fully deductible if MAGI is less than $183,000 (joint)
- Partially deductible if MAGI is between $183,000 and $193,000 (joint)
- No deduction if MAGI is over $193,000
Even if your contribution is not deductible, contributing to a Traditional IRA is still a great way to grow retirement savings tax-deferred.
Savings within a Traditional IRA grow tax-deferred as long as they remain in the account. This means you don’t pay taxes on any gains, dividends, or interest earned on your investments each year. Once you start taking money from the account, however, any withdrawals are taxed as ordinary income.
If you make any withdrawals before age 59 1/2, you may be charged a 10% IRS early-withdrawal fee. There are a few exceptions which allow you to avoid the 10% penalty:
- Qualified first-time home purchase ($10,000 lifetime limit)
- Qualified higher-education expenses
- Qualified military reservist
- Medical expenses in excess of 10% of Adjusted Gross Income (AGI)
- Health insurance premiums if unemployed for 12 consecutive weeks
- Substantially equal payments made over life expectancy
These exceptions allow you to take money out without the 10% IRS early withdrawal fee. However, keep in mind you will still pay taxes on any amount taken from your Traditional IRA.
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View Wells Fargo’s Traditional IRA Custodial Agreement and Disclosures (PDF)*