Traditional IRA

Learn more about Traditional IRAs.

Roth IRA

Learn more about Roth IRAs.

How does it work?

Your contributions to a traditional IRA may be tax deductible. Your earnings grow tax-deferred, but your withdrawals will be taxed as ordinary income when you retire.

If you make withdrawals before age 59½, in general, you must pay a 10% penalty in addition to income tax. (For exceptions, see “How Can I Withdraw Money from My Traditional IRA?”) Beginning in the year you turn 70½, you must start making regular minimum withdrawals or else pay a penalty.

Your contributions to a Roth IRA are not tax deductible, but you may pay no tax on your withdrawals when you retire. If you make withdrawals before you have a Roth IRA account open five years, you may have to pay income tax on your earnings and a penalty (but not on the money you contributed) unless an exception applies.

Any withdrawn earnings are subject to income tax, and a 10% penalty may apply to earnings or amounts attributable to a prior conversion from a Traditional IRA that is withdrawn within a 5-year period as computed by law, unless an exception applies.

In general, you are not required to make regular minimum withdrawals at any time, with certain exceptions.

Which kind of IRA is right for me?

If you think your tax rate in retirement will be lower than it is now, and if you do not plan to withdraw your money before age 59½, a Traditional IRA may be the best choice for you.

If you think your tax rate in retirement will be higher than it is now, or you might need your money before age 59½, a Roth IRA may be the best choice for you. In addition, if your income is too high to qualify for the Traditional IRA tax deduction, a Roth IRA may be a good alternative.

Can I contribute?

If you have taxable compensation,* you can contribute to a Traditional IRA until (but not including) the year you turn 70½.

If your spouse has taxable compensation but you do not, you can contribute to a Traditional IRA until (but not including) the year your spouse turns 70½.

If neither you nor your spouse has any taxable compensation during this tax year, you may not contribute to a Traditional IRA.

If you have taxable compensation,* and your income is below a certain level, you can contribute to a Roth IRA at any age.

If your spouse has taxable compensation, below a certain level, but you do not, you can contribute to a Roth IRA at any age.

If neither you nor your spouse has any taxable compensation during a tax year, you may not contribute to a Roth IRA.

How much can I contribute?

If you will not have reached age 50 in 2009, you can contribute up to $5,000 this year for all your IRAs combined (Traditional and Roth). If you will have reached age 50 before or during 2009, you can contribute up to $6,000. If you are single, you cannot contribute more than your taxable compensation during the year. If you are married and you and your spouse each have taxable compensation, you can establish separate IRAs and can each contribute up to $5,000 for 2009 (or $6,000 if you reach age 50 before or during the year). If your combined income is less than your combined limits, the combined IRA contributions are limited to 100% of your taxable compensation.* 

For 2009, the amount you are allowed to contribute to a Roth IRA will be lower if your modified adjusted gross income is $101,000 or more (if you are single) or $159,000 or more (if you are married, filing jointly). The amount would be zero if your modified adjusted gross income is $116,000 or more (if you are single) or $169,000 or more (if you are married, filing jointly).

Is my contribution tax-deductible?

Your contribution, within the allowable limit, is fully tax-deductible if you are not covered by a retirement plan at work.

For tax year 2009, if you are covered by a retirement plan at work, your Traditional IRA contributions are generally fully deductible if your modified adjusted gross income is $55,000 or less (if you are single) or $89,000 or less (if you are married, filing jointly). Above those amounts, the IRA deduction will be reduced, and eliminated at or above $65,000 (single) and $109,000 (married, filing jointly). The deduction may be affected by Social Security benefits received, or if a spouse is covered by a retirement plan at work.

Contributions to Roth IRAs are never tax-deductible.

Note for Traditional IRAs:

If you are single and are not covered by a retirement plan at work, your contributions are generally fully deductible without regard to income limits.

For 2009, if you are married, filing jointly, and your spouse is covered by a plan at work (and you are not), the deductibility of your contributions phases out for modified adjusted gross income between $166,000 and $176,000.

Can I roll over money from other accounts?

You can roll over money held in employer-sponsored retirement arrangements (401(k)s, SEPs, etc.), government deferred compensation plans (section 457 plans), or tax-sheltered annuities (section 403 plans). If properly and timely rolled over, the 10% additional tax on early distributions will not apply.

If you qualify, you can roll over money from other Roth IRAs or from SEP IRAs or SIMPLE IRAs. If you qualify, you may also convert money from a Traditional IRA or SIMPLE IRA (if your modified adjusted gross income is not more than $100,000, and you are not married, filing separately), but the amount converted is taxable in the year of the conversion.