Traditional IRA Restrictions

by Bob Haring

    Almost anyone can set up an individual retirement arrangement, as the Internal Revenue Service now labels those plans. Some restrictions apply on contributions and withdrawals, and most are related to age and income. You can open a traditional IRA in addition to other retirement plans, but your tax deductions for IRA contributions could be limited if either you or your spouse is covered by an employer's retirement program.

    Basic restrictions on traditional IRAs are that you have to open them in an IRS-approved financial institution, must be younger than 70 1/2 and have earned income. Banks, savings and loans, credit unions and even mutual funds and brokerages offer IRAs. Earned income means wages, salaries or other employment compensation or self-employed income.

    Your contributions to an IRA are restricted to a maximum of $5,000 a year, or $6,000 if you’re older than 50, as of 2012. Married couples can contribute double those limits in most cases. You don't have to contribute the full amount each year, but you're restricted from contributing more and are subject to a 6 percent tax on amounts over the limit. You can have more than one IRA, but your contributions are restricted to a total for all of them.

    Deductions from taxable income for IRA contributions are restricted by how much money a taxpayer makes. You can't deduct any contributions if your income is over $68,000 for a single taxpayer or $183,000 for joint filers; no deduction restrictions apply for incomes under $58,000 or $173,000 for those categories. Taxpayers with incomes between those limits have deductions limited by an IRS formula.

    You can't withdraw IRA funds before you're 59 1/2 without paying a 10 percent penalty, in addition to paying taxes on the withdrawal as regular income. You have to start withdrawing money at 70 1/2. Some hardship exceptions apply to early withdrawals for such things as home purchases or educational expenses, but no exceptions apply to required minimum withdrawals.

    Contributions have to be made by the filing deadline for the tax year. That's April 15, unless there are calendar conflicts. You can't make up contributions: If you put in less than the maximum one year, you can't put in more the next. You can take out some or all of a contribution without penalty in the year you make it, but once that April 15 deadline passes, you're restricted from withdrawing the money without penalty.

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    About the Author

    Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.

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