Do I qualify for a traditional IRA? What are the rules that I should be aware of when opening this type of individual retirement account? If you have been asking yourself such questions, then you are in the right place, because I will be presenting you with enough information to help you get started on the right foot, as far as traditional IRAs are concerned. Read on till the end to find out more.
See our top-5 List of Gold & Silver IRA service providers
Traditional IRAs and Roth IRAs share a number of characteristics, but you should be in a position to tell them apart. You should know whether you qualify for either account and what it means to you as an investor moving forward. To get started, let me present a quick summary of the traditional IRA rules that you should know, to help you know whether you have what it takes to open one.
- The maximum annual contribution limit for those aged below 50 is $6000 and $7000 for those aged 50 (and over 50). Note that the limits change from year to year, so you always confirm this with your IRA service provider.
- Your contributions may be tax-deductible in the year that you make them.
- Investments within your traditional IRA grow tax-deferred.
- The withdrawals upon retirement get taxed as ordinary income.
- According to the IRS, you should be ready to take the Required Minimum Distributions (RMDs), upon hitting 72 years (Or 70 ½ for those who turned 70 ½ in 2019, or earlier).
- Those who take unqualified withdrawals, or before hitting 59 ½ years, end up triggering a 10% early withdrawal penalty and have to pay income taxes on their withdrawals.
Traditional IRA contribution rules
For you to qualify to open a traditional IRA, you need to have an earned income. Also, you should know that your annual contributions to your traditional IRA should not exceed your annual earnings. Otherwise, as already highlighted above, the contribution limits in 2021 and 2022 are as follows:
- $6000 for those aged below 50
- Or, $7000 for those 50 or older (the extra $1000 is known as a catch-up contribution).
Some other contribution rules you should be aware of include:
- You are allowed to contribute to both a traditional IRA and a Roth IRA at the same time, in the same year
The IRS allows those who qualify for the two types of IRAs to contribute to them at the same time, provided that the combined contribution amount does not go beyond the annual limit of $6000 or $7000.
- Those who do not qualify to make deductible contributions can still put some funds into a traditional IRA
In the case of Roth IRAs, those who make an insane amount of money are not allowed to open and contribute to an account.
- There are no minimum deposits during the IRA account opening process
Some brokers may set their own account minimum, but the IRS does not require that you get started by depositing a given amount of money, provided you make the contributions and do not exceed the limits by the end of the year.
- You can make contributions to your traditional IRA and to your 401(k) at the same time (in the same year)
This is allowed, provided that you stay within the required contribution limits for each type of account.
***See my #1 Recommended Gold & Silver IRA Solution
Deduction Rules Followed by Traditional IRA account owners
One of the questions that most people ask is “how much of their contributions they are allowed to deduct from their taxes”. The truth of the matter is that deductibility is based on one’s income, as well as whether the person in question or their spouse is covered by an employer-sponsored retirement plan, e.g. a 401(k). If neither you nor your spouse has an employer-sponsored plan, then the deduction can be done on all your contributions, up to the set limit.
Withdrawal rules followed by traditional IRA account holders
The IRS considers age 59 ½ quite significant, in that it is the age at which those nearing their retirement years are allowed to start taking their withdrawals from their individual retirement accounts. Remember that trying to take withdrawals before meeting this age requirement (hitting 59 ½ years) can lead to the IRS penalizing you (a 10% early withdrawal penalty), and some extra income taxes.
Under the new IRS rules, those who live to age 72 and have been saving in a traditional IRA are required to start taking their required minimum distributions (RMDs). Investors were previously required to take their RMDs upon hitting 70 ½ years, which was the case until the end of 2019 when the rules were changed. Those who fail to take their RMDs are usually in deep trouble since the IRS starts punishing them with a 50% excise tax on the amount of money they fail to withdraw.
Exceptions for the 10% withdrawal penalty
If you need the funds in your traditional IRA before hitting 59 ½ years, then you can confirm if the reason you need the money is exempted from the hefty 10% withdrawal penalty. Below are the instances in which you can take early withdrawals and only pay income tax:
- If the IRS deems your request for higher education expenses worthy of approval. You can, in this case, use the funds to meet the costs of higher education for yourself, your spouse, children, or grandchildren.
- As a member of the military, you can take your withdrawals if you’re required to be on active duty for over 179 days.
- In case you become disabled, either totally or permanently.
- Those who want to purchase, build or rebuild their first home (based on IRS rules of a first home), can take up to $10,000 of the funds in their account for this purpose.
- People with unreimbursed medical expenses that are over 7.5% of their adjusted gross income are also allowed to take distributions.
- If you are the legal beneficiary of the deceased traditional IRA owner.
- According to the new Secure Act, those who become parents through birth or adoption can take distributions of up to $5000.
Based on what you read above, you can decide whether to open a traditional IRA or simply take an alternative route. You may also want to expand your retirement investment options, by opening self-directed IRAs. Check out our top-recommended self-directed IRAs that allow investors to build their wealth by investing in gold.
See Gold Retired’s Top-5 Recommended Gold and Silver IRA Solutions
See Gold Retired’s Top-5 Recommended Bitcoin IRA Solutions
That will be all for this article in which we have responded to the question “Do I qualify for a traditional IRA?” I hope that reading the article has presented you with the insights to help you answer the question from a personal point of view. I would be pleased to know what you think about opening a traditional IRA- drop them in the comments section.
I wish you well,
Eric, Investor and Team Member at Gold Retired!
Leave a Reply