Individual retirement accounts (IRAs) are investment accounts with tax benefits that are specifically designed to help you save and grow money for retirement. There are several types of IRAs and they differ mostly due to tax implications. A traditional IRA is one of the most popular types.
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How a traditional IRA works
A traditional IRA is an individual retirement account that allows you to make deposits that are fully or partially tax-deductible each year based on your income and filing status.
A traditional IRA is best for people who can deduct their full IRA contribution from their taxes. This is because your untaxed (or less taxed) contributions help you exponentially grow your investment, have more money saved for retirement, and reduce your taxable income each year you contribute. The investment itself will grow tax-free until you start to make withdrawals on it. When you finally make retirement withdrawals, they will be taxed as ordinary income.
Like anything involving taxes, there are rules on traditional IRAs and they can change year to year. We’ve compiled the newest rules for traditional IRAs in 2022.
To help you decide if a traditional IRA is right for you, first up are the deduction rules.
Traditional IRA tax deduction rules in 2022
Three things directly impact how much of your contributions you can deduct from your federal and state income taxes: whether you have an employer-sponsored retirement plan, your filing status, and your adjusted gross income (AGI).
In the eyes of the IRS, your AGI includes many forms of income, such as wages, commissions, self-employment income, interest, and dividends.
When you can take a full deduction
You aren’t covered by an employer-sponsored retirement plan and you’re filing taxes as:
A single person or head of household
A qualifying widow(er)
Married filing jointly or separately with a spouse who also isn’t covered by an employer-sponsored retirement plan
Married filing jointly with a spouse who is covered with an employer-sponsored retirement plan and your AGI is $204,000 or less
You are covered by an employer-sponsored retirement plan and you’re filing taxes as:
A single person or head of household with an AGI of $68,000 or less
Married filing jointly or a qualifying widow(er) with an AGI of $109,000 or less
When you can take a partial deduction
You aren’t covered by an employer-sponsored retirement plan and you’re filing taxes as:
Married filing jointly with a spouse who is covered with an employer-sponsored retirement plan and your AGI is more than $204,000 and below $214,000
Married filing separately with a spouse who is covered with an employer-sponsored retirement plan and your AGI is less than $10,000
You are covered by an employer-sponsored retirement plan and you’re filing taxes as:
A single person or head of household with an AGI of at least $68,000 and below $78,000
Married filing jointly or a qualifying widow(er) with an AGI of at least $109,000 and below $129,000
Married filing separately with an AGI of less than $10,000
When you cannot take a deduction
You aren’t covered by an employer-sponsored retirement plan and you’re filing taxes as:
Married filing jointly with a spouse who is covered with an employer-sponsored retirement plan and your AGI is $214,000 or more
Married filing separately with a spouse who is covered with an employer-sponsored retirement plan and your AGI is $10,000 or more
You are covered by an employer-sponsored retirement plan and you’re filing taxes as:
A single person or head of household with an AGI of $78,000 or more
Married filing jointly or a qualifying widow(er) with an AGI of $129,000 or more
Married filing separately with an AGI of $10,000 or more
If you’re unsure of whether you should open a traditional IRA, compare your options to other retirement plans, such as a Roth IRA.
Traditional IRA contribution rules in 2022
You can make contributions at any age: The maximum age for making contributions used to be 70 ½, but that was repealed for tax years beginning after 2019.
You can contribute to multiple retirement accounts: If you’re contributing to a retirement plan through your job, like a 401(k), you can also contribute to a traditional IRA.
You can typically contribute a maximum of $6,000 to $7,000 per year: People aged 50 and older can contribute up to $7,000 annually. Younger people can contribute a maximum of $6,000 annually. Rollover contributions to an IRA are exempt from this limit.
Contributions can be tax deductible: For example, if your annual income is $50,000, and you contribute $6,000, your taxable income can drop to $44,000. If your total income is less than the maximum, you could contribute your entire income.
Traditional IRA withdrawal rules in 2022
When it comes to taking money out of your traditional IRA, age matters.
You can make withdrawals without penalty at age 59 ½: This is the age you can start taking money out of your traditional IRA without a financial fee.
You must start taking withdrawals at age 72: In 2020, the required mandatory distribution age (RMD) changed to 72 from age 70 ½.
Withdrawals are subject to penalty if you’re younger than 59 ½: You can withdraw, but your withdrawals are subject to a 10% tax penalty. Depending on your situation, though, you might be able to get an exemption (see below for examples).
Exemptions to the withdrawal penalty
First-time home purchase, up to $10,000
Qualified educational expenses
Death and disability
Unreimbursed medical expenses
Health insurance if you’re unemployed
Qualified military reservists called to active duty
Coronavirus-related relief
Deciding if a traditional IRA is right for you
There’s no wrong choice for an IRA, but there may be the best choice. Other types of IRAs offer different tax benefits — take a look at what they offer to choose which works best for you.
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