Rules & Regulations for Traditional IRA Accounts

Building a nest egg for retirement may mean putting all your financial eggs into one basket, or it may include a variety of investment baskets. In 1974, a golden-years egg was introduced into the retirement savings nest for many taxpayers who no longer had to rely on their company pension or their personal savings to fund their senior years. With the introduction of the individual retirement account, taxpayers were able to take control of their financial planning as they saved for the day they'd leave the workforce behind.

What is a Traditional IRA?

The passage of the Employee Retirement Income Security Act (ERISA) in 1974 regulated many company benefits such as retirement plans, pension plans and health care plans. But the law’s scope went beyond regulating current benefits by implementing a new benefit – the individual retirement account. This first IRA allowed taxpayers who were not covered under their workplace pension plans to establish their own retirement plan.

But by 1986, the Economic Recovery Act (ERTA) opened IRAs to all qualifying taxpayers. After the debut of the first IRA in 1974, numerous spinoffs have resulted in a menu of different types of IRAs. Among these was the Savings Incentive Match Plan for Employees (SIMPLE IRA), which debuted in 1996, and the Roth IRA, which debuted in 1997. Because these two IRAs follow different rules than other IRAs, a "traditional IRA" is simply any IRA other than a Roth IRA or SIMPLE IRA.

Traditional IRA Rules and Regulations

Among other details, the nutshell version of traditional IRA rules covers these basics:

  • You can continue to make contributions to your traditional IRA account until the year that you reach age 70 ½.
  • Contributions that you make to a traditional IRA are tax-deferred; you won’t owe income tax on this money until you withdraw your funds.
  • You must begin taking withdrawals (called distributions) from your traditional IRA by April 1 in the year after you reach the age of 70 ½.
  • You can contribute to a traditional IRA regardless of the amount of your income.
  • You can deduct the full amount of the eligible contributions you make to a traditional IRA on your income tax return if you’re not covered by a workplace retirement plan. (If you’re covered by a workplace plan, IRS guidelines determine whether your contributions are deductible.)

Traditional IRA Allowable Income Sources

Although the IRS doesn’t place a cap on the amount of your income, you will have to have a certain type of income to be eligible for contributing to a traditional IRA. You must have “earned income” (also called “compensation”) instead of “unearned income.” Earned income is what you make from working a job (for example, your wages, salary, tips, commissions or self-employment income). Unearned income sources include pensions, annuities, dividends and interest income. (Two exceptions the IRS allows to count toward your earned income are alimony and separate maintenance.)

Traditional IRA Limits for Contributions

The maximum amount you're allowed to contribute to a traditional IRA may change from year to year, depending on new tax laws. In 2019, you can contribute up to $6,000 (if you’re younger than age 50) and $7,000 (if you’re 50 years old or older). For tax years 2015 through 2018, maximum contributions to a traditional IRA are $5,500 (if you’re younger than age 50) and $6,500 (if you’re 50 years old or older). These contribution limits come with two caveats – the amounts represent your total contribution to traditional and Roth IRAs, and the amount you contribute cannot be greater than your taxable compensation.

Traditional IRA Deductions

Taking IRA deductions on your income tax return is a tax perk that reduces the amount of your taxable income, which also reduces the amount of income tax you have to pay. Traditional IRA “deductions” are not the same as the standard deduction or itemized deductions you claim on your income tax return. Although you have to choose between taking the standard deduction and itemizing your deductions, you can also take traditional IRA deductions in addition to your choice between these two. If you’re not covered by your employer’s retirement plan – and neither is your spouse – you can deduct the total amount of your IRA contributions. But if you or your spouse also has a workplace retirement plan, you may only be able to claim a reduced deduction.

Figuring Traditional IRA Reduced Deductions

If you have to take a reduced income tax deduction because you or your spouse has a workplace retirement plan, you’ll have to perform some simple calculations to determine the amount of your modified adjusted gross income by using two IRS worksheets:

  1. Visit IRS.gov/forms and search for IRS Publication 590-A (Contributions to Individual Retirement Arrangements [IRAs]). Look in this publication for Worksheet 1-1 (Figuring Your Modified AGI), and follow the step-by-step prompts to figure your modified adjusted gross income, which you’ll enter on Line 8. 
  2. Find Worksheet 1-2 in this same publication and transfer the amount of your modified adjusted gross income (from Line 8 of Worksheet 1-1) to Line 2 of Worksheet 1-2. Complete the rest of this worksheet to determine the reduced IRA deduction you can claim on your income tax return.

Reduced Deduction Amounts

If you're covered by a retirement plan at work, which means you have to calculate your adjusted gross income to determine the amount of your reduced tax deduction, this reduced deduction also depends on your filing status:

Tax Year 2018

  • Single, head of household or married filing separately (and you didn’t live with your spouse at any time during the year). For a modified adjusted gross income of $63,000 or less, you can take the full contribution limit. For a modified adjusted gross income that's more than $63,000 but less than $73,000, you’ll have to take a partial deduction. And for a modified adjusted gross income of $73,000 or more, you can’t take any deduction.
  • Married filing separately (but you lived with your spouse at any time during the entire tax year). For a modified adjusted gross income of less than $10,000, you'll be able to take a partial deduction. For a modified adjusted gross income of $10,000 or more, you can’t take any deduction.
  • Married filing jointly, or qualifying widow(er). For a modified adjusted gross income of $101,000 or less, you can take the full contribution limit. For a modified adjusted gross income of more than $101,000 but less than $121,000, you’ll have to take a partial deduction. And for a modified adjusted gross income of $121,000 or more, you can’t take any deduction.

Tax Year 2019

  • Single, head of household or married filing separately (and you didn’t live with your spouse at any time during the year). For a modified adjusted gross income of $64,000 or less, you can take the full contribution limit. For a modified adjusted gross income that's more than $64,000 but less than $74,000, you’ll have to take a partial deduction. And for a modified adjusted gross income of $74,000 or more, you can’t take any deduction.
  • Married filing separately (but you lived with your spouse at any time during the entire tax year). For a modified adjusted gross income of less than $10,000, you'll be able to take a partial deduction. For a modified adjusted gross income of $10,000 or more, you can’t take any deduction.
  • Married filing jointly, or qualifying widow(er). For a modified adjusted gross income of $103,000 or less, you can take the full contribution limit. For a modified adjusted gross income of more than $103,000 but less than $123,000, you’ll have to take a partial deduction. And for a modified adjusted gross income of $123,000 or more, you can’t take any deduction.

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About the Author

Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.


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