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Traditional IRA

A traditional IRA is a tax-deferred retirement account that allows individuals to save for retirement on a tax-deferred and potentially tax-deductible basis.

Overview

Overview

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

What is a traditional IRA?

A traditional IRA is a tax-deferred retirement account that allows individuals to save for retirement on a tax-deferred basis.

How does a traditional IRA work?

In 2022, an individual may contribute up to $6,000 to a traditional IRA, plus a catch-up contribution of $1,000 for those individuals age 50 and older. Contributions may be made at any time throughout the year and as late as the individual’s tax-filing deadline (generally April 15) for the prior year.

Traditional IRA contributions may be partially, fully, or non-tax-deductible, depending on a number of factors, including household income, tax-filing status, and active participation in a workplace retirement plan (e.g., 401(k)). Investment gains are not subject to taxation until funds are withdrawn. Instead, withdrawals are taxed as ordinary income in the year received. For additional information, see traditional IRA distributions.

Who should consider a traditional IRA?

  • Individuals that don’t have access to a 401(k) plan
  • Individuals looking to supplement workplace retirement plan. Eligible individuals can contribute to both their workplace retirement plan (i.e. 401(k), 403(b), SIMPLE IRA, etc.) and a traditional IRA.
  • Individuals seeking a tax deduction
  • Individuals seeking tax-deferred growth


What benefits does a traditional IRA offer?

  • Contributions may be tax deductible1.
  • Earnings are tax-deferred until withdrawn. 
  • Minimum withdrawals are not required until the year an account owner reaches age 72
  • Flexible withdrawal options 
  • Assets can be converted to a Roth IRA regardless of age or income.

1 An item or expense, such as an IRA contribution, which, when subtracted from adjusted gross income, reduces the amount of income subject to tax.

 This information is being provided as general information and is not intended to be legal or tax advice. Lord Abbett does not provide legal or tax advice.

There may be fees, expenses, taxes, and penalties associated with early IRA withdrawals.

Lord Abbett will waive (or otherwise pay) the yearly $10.00 custodial fee that would be charged each year on an ongoing basis to every new IRA account and, therefore, will not assess a custodial account fee in 2022 or any year afterward. Fund level fees and expenses are still applicable. Please see the current prospectus.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

Eligibility

Eligibility

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation. 

An individual is eligible to make contributions to a traditional IRA if the following criteria are satisfied:

  • Compensation (earned income)

  • “Spousal IRA”
     

Regardless of income or participation in a workplace retirement plan anyone can fund an IRA.

Participating in your employer’s workplace retirement plan (e.g., 401(k), 403(b), SIMPLE IRA, etc.) does not preclude an individual from contributing to an IRA. Although workplace plan participation may affect an individual’s ability to make a tax-deductible traditional IRA contribution.

Traditional IRA Contribution Deductibility

An individual (or if married; their spouse) not covered by a workplace retirement plan, regardless of income is eligible to make a fully deductible traditional IRA contribution. 

Single:

An individual covered by a workplace retirement plan can fully deduct their traditional IRA contribution if their income is less than $66,000 in 2021 and $68,000 in 2022. A partial deduction is available in 2021 if income is above $66,000 but not more than $76,000 ($68,000–$78,000 in 2022).

Married (filing jointly): One spouse covered by a workplace retirement plan

Once workplace retirement plan participation extends to you or your spouse, the deductibility rules change. A 2021 deductible traditional IRA contribution for a married couple filing jointly, where only one spouse is covered by a workplace retirement plan, the spouse not covered may deduct their full contribution if the couples’ joint income is less than $198,000. Once joint income exceeds $198,000 but does not exceed $208,000, a partial deduction is allowed. Once joint income exceeds $208,000, a deduction is not permitted. The income limits are increased to $204,000–$214,000 for 2022.

Married (filing jointly): Both spouses covered by a workplace retirement plan

For a 2021 traditional IRA contribution for a married couple filing jointly, where both spouses are covered by workplace retirement plan, a fully deductible traditional IRA contribution is permitted if joint income is less than $105,000. A partial deduction is available if joint income is more than $105,000 but does not exceed $125,000; a deduction is not permitted if joint income exceeds $125,000. The income limits are increased to $109,000–$129,000 for 2022.

Traditional IRA contribution deduction eligibility is summarized here:

If filing status is... And modified adjusted gross income (MAGI)1 is... Then the investor may take...
Single or head of household $66,000 or less in 2021 ($68,000 in 2022) A full deduction
More than $66,000, but less than $76,000 in 2021 ($68,000 to $78,000 in 2022) A partial deduction
 
$76,000 or more in 2021 ($78,000 in 2022) No deduction
Married filing jointly or qualifying widow(er) and both covered by a plan $105,000 or less in 2021 ($109,000 in 2022) A full deduction
More than $105,000, but less than $125,000 in 2021 ($109,000 to $129,000 in 2022) A partial deduction
$125,000 or more in 2021 ($129,000 in 2022) No deduction
Married filing jointly and one covered by a plan Less than $198,000 in 2021 ($204,000 in 2022) A full deduction for spouse not covered
More than $198,000, but less than $208,000 in 2021 ($204,000-$214,000 in 2022) Partial deduction for spouse not covered
More than $208,000 in 2021 ($214,000 in 2022) No deduction

 

1 Modified adjusted gross income (MAGI) includes wages, interest, capital gains, income from retirement accounts and alimony paid received by the taxpayer adjusted downward by specific deductions, including contributions to deductible retirement accounts and alimony paid by the taxpayer; but not including standard and itemized deductions.

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies. 

This information is being provided as general information and is not intended to be legal or tax advice. Lord Abbett does not provide legal or tax advice.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

Contributions

Contributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

How much can an investor contribute to a traditional IRA?

In 2022, an individual may contribute up to $6,000 to a traditional IRA plus a catch-up contribution of $1,000 for those individuals age 50 and older.

YEAR

Contribution Limit

Age 50 Catch-up Contribution

2022

$6,000

$1,000

2021

$6,000

$1,000


Can an investor contribute to both a traditional and a Roth IRA2?

Yes, assuming an investor meets Roth IRA eligibility requirements. However, an investor has one combined contribution limit of $6,000 ($7,000 if age 50 or older).

When can I contribute to a traditional IRA?

An investor can make traditional IRA contributions anytime throughout the year. In addition, contributions for the prior tax year can be made as late as the investor’s tax filing due date; generally April 15th (not including extensions). For example, an investor is eligible to make a 2021 IRA contribution as late as April 15, 2022. 

What if the traditional IRA contribution limit is exceeded?

An investor needs to remove the excess funds by their tax-filing deadline, including extension, or face a 6% excise tax on the excess.

Why would an investor fund a traditional IRA if the contribution is not tax deductible?

Traditional IRA contributions earnings are tax-deferred until withdrawn. It may be a potentialadvantage for investors, then, to accumulate tax-deferred funds, allowing the full amount invested plus earnings to compound tax deferred until withdrawn. Further, many individuals cannot contribute to a Roth IRA due to eligibility restrictions. Therefore, the only IRA savings option is to make nondeductible traditional IRA contributions. 

A Roth IRA is a tax-deferred and potentially tax-account plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including earnings, are tax-free if the account has been held at least five years and the individual is at least 59½, or if the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

This information is being provided as general information and is not intended to be legal or tax advice. Lord Abbett does not provide legal or tax advice.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

Distributions

Distributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation. 

What types of distributions can be taken from a traditional IRA?

There are several different kinds of distributions that can be taken from a traditional IRA. We discuss each type below:

  • Normal

  • Premature (without an exception)

  • Premature (with an exception)

  • Required minimum distribution (RMD)

  • 60-day rollover

  • Distributions due to death


What is a normal distribution from a traditional IRA?

A normal distribution occurs after the owner attains age 59½. A normal distribution is generally subject to taxation in the year withdrawn, but the 10% early withdrawal penalty tax does not apply.

What is a premature distribution (without an exception)?

A premature distribution occurs upon the owner withdrawing funds before age 59½ and no exception applies. A premature distribution is both taxable and subject to a 10% early withdrawal penalty tax.

What is a premature distribution (with an exception)?

A premature distribution occurs upon the owner withdrawing funds before age 59½ and satisfying an exception. A premature distribution is subject to taxation, but the 10% early withdrawal penalty tax does not apply.

Common exceptions to the 10% additional tax on early withdrawals are:

  • Substantially equal periodic payments (“72(t)”)
  • Disability
  • Death
  • Qualified higher education expenses
  • Pay for health insurance premiums after receiving unemployment benefits for more than 12 weeks
  • Unreimbursed medical expenses (greater than 7.5% of adjusted gross income)
  • First-time home purchase (lifetime limit of $10,000) 
  • Qualified birth or adoption
  • IRS levy


What is a required minimum distribution (RMD) from a traditional IRA?

The SECURE Act of 2019 changed the age of a retirees required beginning date from age 70½ to 72. 

A traditional IRA account owner is required to take a minimum distribution the year he or she turns age 72. The minimum distribution rules permit the initial or first minimum distribution to be deferred until April 1st of the following year. Delaying an initial RMD requires the account owner to take two RMDs the following year.

If the full RMD is not taken each year, a 50% penalty tax is assessed on the amount that should have been but was not taken. See our calculator to determine your RMD.

What is the 60-day withdrawal and rollover rule?

Once in a 12-month period (not calendar year), an IRA owner may withdraw any amount, for any reason, from any of their IRAs, and repay the funds within 60 days without being subject to taxation or an early withdrawal penalty. If not repaid within the allotted 60-day window, the owner will be subject to potential taxation and penalties.

The one IRA rollover per year applies on a per-taxpayer basis—not per IRA. Therefore, an investor can elect a single 60-day withdrawal and rollover in a 365-day period regardless of the number or type of IRAs owned.

What death benefits are available from a traditional IRA?

When a traditional IRA account owner dies, an inherited or beneficial IRA is created. However, the treatment of an inherited IRA differs, depending on who inherits the account. Traditional IRAs inherited by a surviving spouse differ from a non-spouse beneficiary.

Spousal beneficiary:

Spousal beneficiary has the following options available upon inheriting a traditional IRA:

  • Treat the IRA as his or her own IRA
  • Rollover the IRA into his or her own IRA
  • Transfer the IRA to an employer sponsored plan where he or she is a participant
  • Remain a beneficiary 


Non-Spouse Beneficiary:

The Setting Every Community for Retirement Enhancement (SECURE) Act of 2019 introduced significant changes to long-standing rules that apply to retirement accounts inherited by a non-spouse beneficiary. The new rules apply to beneficiaries that inherit an IRA on or after January 1 2020.  

One of the most significant changes was the elimination of the ‘stretch’  for most non-spouse designated beneficiaries and the introduction of a “10-Year Rule” thus requiring certain beneficiaries to liquidate the entire balance of their inherited retirement account within ten years after the account owner’s death.

A Roth IRA is a tax-deferred and potentially tax-free account available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small business employers a simplified method to make contributions toward their employees retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to a SIMPLE IRA established for each employee. SIMPLE IRA plans are maintained on a calendar-year basis.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally must start taking withdrawals from a retirement plan account at age 72. Roth IRAs are not subject to RMDs.

Risks Involving the Stretch IRA Strategy:
Withdrawals by the account holder or beneficiaries of more than the required minimum distribution (RMD) will exhaust the account at a faster pace, reducing or eliminating the effectiveness of the stretch strategy. Distributions greater than the RMD could subject the payment to higher federal and possibly state income taxes. When investing assets that will be used to stretch IRA payments, the investor must be cognizant of any front-end or back-end sales charges that can reduce the assets available. During an extended period of declining investment returns, investors will experience income fluctuations that may cause additional withdrawals to be made that will exhaust the account at a more rapid rate. There can be no guarantee that a Stretch IRA strategy will be advantageous to your specific situation, and many of its benefits are based on current tax laws, which are subject to change. If these laws change in the future, an investors ability to maintain estimated distributions may be affected. Lengthy distribution periods, much like those involved in a Stretch IRA, expose an investor to significant market risk.

This information is being provided as general information and is not intended to be legal or tax advice. Lord Abbett does not provide legal or tax advice.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances. 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

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