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Traditional IRA

A traditional IRA offers individuals under age 70½ and who have earned income a vehicle to save for retirement on a tax-deferred and possibly a 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 available to those individuals under age 70½ and have earned income.  

How does a traditional IRA work?

In 2019, 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 Investment gains are not subject to taxation until funds are withdrawn.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 workplace retirement plan
  • Supplement workplace retirement plan. Individuals can contribute to both their workplace retirement plan (i.e. 401(k), 403(b), etc.) and a traditional IRA.
  • Anyone seeking tax-deferred growth
  • A non-working spouse


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  • Earnings are tax-deferred until withdrawn.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 70½
  • Flexible withdrawal options 
  • Bankruptcy protection 
  • Assets can be converted to a Roth IRA regardless of income.
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saving rolling

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:

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)) 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 there income is less than $63,000 in 2018 and $64,000 in 2019. A partial deduction is available in 2018 if income is above $63,000 but not more than $73,000 ($64,000–$74,000 in 2019).

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 2018 traditional IRA deductible 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 $189,000. Once joint income exceeds $189,000 but does not exceed $199,000, a partial deduction is allowed. Once joint income exceeds $199,000, a deduction is not permitted. The income limits are increased in 2019 to $193,000–$203,000.

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

A 2018 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 $101,000. A partial deduction is available if joint income is more than $101,000 but does not exceed $121,000; a deduction is not permitted if joint income exceeds $121,000. The income limits are increased to $103,000–$123,000 for 2019.

Traditional IRA contribution deduction limits are summarized in this table:

If filing status is... And modified adjusted gross income (MAGI)is... Then the investor may take...
Single or head of household $63,000 or less in 2018 ($64,000 in 2019) A full deduction
More than $63,000, but less than $73,000 in 2018 ($64,000 to $74,000 in 2019) A partial deduction
 
$73,000 or more in 2018 ($74,000 in 2019) No deduction
Married filing jointly or qualifying widow(er) and both covered by a plan $101,000 or less in 2019 ($103,000 in 2019) A full deduction
More than $101,000, but less than $121,000 in 2018 ($103,000 to $123,000 in 2019) A partial deduction
$119,000 or more in 2017 ($121,000 in 2018) No deduction
Married filing jointly and one covered by a plan Less than $189,000 in 2018 ($193,000 in 2019) A full deduction for spouse not covered
More than $189,000, but less than $199,000 in 2018 ($193,000-$203,000 in 2019) Partial deduction for spouse not covered
More than $199,000 in 2018 ($203,000 in 2019) No deduction

 

Open an IRA

  1. Complete the writable IRA Application

  2. Print and send to Lord Abbett by mail, fax, email or use our Free FedEx shipping option

  3. You’ll receive a confirmation once your IRA is established

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 2019, an individual may contribute up to $6,000 in 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

2018

$5,500

$1,000

2019

$6,000

$1,000


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

Yes, assuming the 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 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 2018 IRA contribution as late as April 15, 2018. 

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?

All traditional IRA contributions earnings are tax-deferred until withdrawn. It may be to an investor’s advantage, then, to accumulate tax-advantaged 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. 

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 a number of 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)

  • Distributions due to death 

  • The 60-day rollover

  • Roth IRA conversion2


What is a normal distribution from a traditional IRA?

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

What is a premature distribution (without an exception)?

A premature distribution (without an exception) occurs upon the account owner withdrawing funds before age 59½ and no exceptions apply. 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 (with an exception) from a traditional IRA occurs upon the account owner withdrawing funds before age 59½ and having the distribution satisfy an exception. A premature distribution (with an exception) 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 (subject to a lifetime limit of $10,000) 
  • IRS levy


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

A traditional IRA account owner is required to take a minimum distribution the year he or she turns age 70½. The minimum distribution rules permit the initial or first minimum distribution to be deferred until April 1st of the following year. Delaying an RMD requires the account owner to take two RMDs the following year.

Example:  Jim turns 70½ in 2018. He can either take his RMD in 2018 or delay it until April 1st 2019. Assuming Jim elects to delay his 2018 RMD, he is required to take two RMDs in 2019; his 2018 deferred RMD and 2019 RMD. All subsequent RMDs must be taken annually by December 31st

If the full RMD is not taken in a given year, a 50% excess tax is assessed on the amount not taken. See our calculator to determine your annual RMD amount.

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:

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

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


Non-Spouse Beneficiary
:

Inheriting a traditional IRA from someone other than a spouse provides more limited options. 

A non-spouse beneficiary has the following options available upon inheriting a traditional IRA:

  • Liquidate the entire account
  • Make withdrawals equaling the entire account value by the end of the fifth calendar year following the account owners death
  • “Stretch” the withdrawals over the beneficiary’s life expectancy


What is a Stretch IRA?

A Stretch IRA is a distribution strategy available to an IRA beneficiary. The beneficiary “stretches” withdrawals over the beneficiary’s life expectancy.

Click here for more information on our Stretch IRA.

We also offer a calculator to assist in providing you minimum payout amounts. 

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