Traditional IRAs

Ensuring financial security in retirement is one of the greatest challenges facing American workers today. With uncertainty over the adequacy of Social Security to meet the needs of future retirees, Americans will be forced to rely more heavily on their own resources to support their retirement lifestyle.

The world of employer-sponsored retirement plans is changing, too. Much less common today is the defined benefit plan. A defined benefit plan is the kind of plan that assures former employees a dependable income throughout their retirement years. The pension world is changing to one in which employees now carry most of the burden of saving for retirement. And even when an employer plan is available, employees may be required to make most or all of the contributions.

How can a Traditional IRA help me save for retirement?

Traditional IRAs offer the following benefits:

• Independence – Individuals may open and fund IRAs without any employer participation
• Immediate tax advantages – Earnings remain tax-deferred until distributed
• Possible tax deductions – Eligible individuals can make deductible contributions
• Accessibility – Individuals may distribute IRA assets at any time
• Flexibility – No annual contribution requirement

Who may contribute and how much?

To make a regular Traditional IRA contribution, the IRA owner must have eligible compensation (generally earned income) equal to or greater than the Traditional IRA contribution amount.

An IRA owner may contribute to all of his or her Traditional IRAs up to the lessor of:

• 100% of earned income, or
• $6,500 for 2023 and $7,000 for 2024 (plus catch-up contributions, if eligible)

If you are ago 50 or older, the maximum contribution limit for the year is increased by $1,000, which is referred to as a "catch-up" contribution, for a total maximum IRA contribution of $7,500 for 2023 and $8,000 for 2024. The catch-up contribution limit is also subject to potential annual cost-of-living-adjustments beginning in 2025. 

Although you may contribute to multiple IRA's, your total contribution cannot exceed the annual contribution limit. 

What is a spousal contribution?

Spousal contributions are a way to make regular contributions to IRAs. An IRA owner who has little or no income can make a regular contribution based on the other spouse's income if the following requirements are met:

1. The couple must be married and file a joint federal income tax return
2. One spouse must have compensation or earned income equal to or greater than the IRA contribution
3. The non-compensated spouse must establish an IRA

The amount of money an individual may contribute per taxable year as a spousal contribution is the same as that for regular IRA contributions ($6,500 for 2023 and $7,000 for 2024, plus catch-up contributions, if eligible).

What is a Simplified Employee Pension (SEP) plan contribution?

A Simplified Employee Pension (SEP) plan is a retirement plan that allows employers to contribute to employees’ Traditional IRAs. SEP plan contributions are subject to different contribution limits than Traditional IRA contributions. Once an employer makes a SEP plan contribution to an IRA, all the general Traditional IRA rules and regulations apply. SEP plan contributions do not affect the individual's ability to make Traditional IRA contributions. The following characteristics apply to SEP plan contributions:

• The maximum SEP plan contribution is the lesser of 25% of compensation up to $66,000 for 2023 and $69,000 for 2024
• SEP plan contributions are always 100% vested
• Eligible participants, regardless of age, may receive SEP plan contributions
• Participants receiving SEP plan contributions also may make regular contributions and, if eligible, catch-up contributions to their Traditional IRAs

What is the contribution deadline?

Individuals must make regular contributions to Traditional and Roth IRAs by the due date of their federal income tax returns (generally April 15th), not including extensions. If the deadline for filing an individual's income tax return falls on a Saturday, Sunday, or legal holiday, he or she will have until the following business day to make his or her contribution. For example, you can make your 2023 tax year contribution any time between January 1, 2023 and April 15, 2024. And you can make your 2024 tax year contribution any time between January 1, 2024 and April 15, 2025.

Are Traditional IRA contributions tax-deductible?

One of the benefits of contributing to a Traditional IRA is that the contribution may be tax deductible. Whether a contribution or a portion of a contribution is deductible depends on active participation (participating in or receiving contributions) in an employer-sponsored retirement plan, marital status, and modified adjusted gross income (MAGI).

May I make a nondeductible contribution?

Yes. Traditional IRA owners are permitted to make nondeductible IRA contributions if they are not eligible for a tax deduction or if they choose to not take a deduction. The combined total of deductible and nondeductible contributions cannot exceed the annual contribution limit of $6,500 for 2023 and $7,000 for 2024, plus catch-up contributions if eligible, or 100% of earned income, whichever is less. IRA owners track their nondeductible IRA contributions by filing Form 8606, Nondeductible IRAs, with their federal income tax returns.

Will I get a tax credit for my contribution?

Certain individuals may receive a nonrefundable tax credit (not to exceed $1,000) for their regular IRA contributions. Eligible individuals determine their credit on IRS Form 8880, Credit for Qualified Retirement Savings Contributions, by multiplying their total Traditional and Roth IRA regular contributions and retirement plan deferrals of up to a maximum of $2,000 by an applicable percentage (below). To be eligible for the tax credit, an individual must:

• have attained age 18 before the end of the taxable year
• not be a dependent or a full-time student, and
• have adjusted gross income (AGI) within limit
  

NOTE: As a result of the SECURE 2.0 Act of 2022, the Saver's Credit will be replaced by a government-paid matching contribution effective for taxable years beginning after December 31, 2026.

​See the charts below which highlight the income levels for eligibility for the tax credit and the applicable percentage used to calculate the tax credit.

Can Traditional IRA assets be moved?

IRA owners may wish to move their IRAs from one financial organization to another. Transfers and rollovers are two methods of moving assets from one IRA to another IRA of the same type.

A transfer is a direct movement of assets between like IRAs. A transfer generally is from one financial organization to another financial organization, but may occur between IRAs at the same financial organization. Although IRA owners direct the asset transfer, they do not have actual receipt of the assets. An IRA owner may make an unlimited number of transfers in a year. The transfers may be for all or any part of an IRA balance. Transfers are not reported to the IRS.

An IRA-to-IRA rollover is another method of moving assets, tax-free from one IRA to another IRA of the same type. With rollovers, the IRA owner, surviving spouse beneficiary, or former spouse actually receives the assets through a distribution before rolling it over to another IRA. A distribution that is eventually rolled over to an IRA is treated like any other type of distribution at the time it is taken from the IRA. Consequently, the withholding rules apply. The distributing financial organization reports the IRA distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and the receiving financial organization reports the rollover contribution on Form 5498, IRA Contribution Information.

Can other assets be contributed to a Traditional IRA?

Contributions made by an employer through a retirement plan known as a Simplified Employee Pension (SEP) plan are contributed to Traditional IRAs. Once SEP plan assets are in the Traditional IRA, all the general Traditional IRA rules and regulations apply. They do not, however, affect an IRA owner’s ability to make regular Traditional IRA contributions. But participating in the SEP plan makes an individual an active participant for purposes of Traditional IRA deductions.

Traditional IRAs also may receive rollovers of pretax and after-tax assets from employer-sponsored retirement plans, which include 401(a) and 403(a) qualified retirement plans (QRPs), 403(b) plans, governmental 457(b) plans, the federal Thrift Savings Plan, and SIMPLE IRA plans (after two years of participation in the SIMPLE IRA).

Recharacterized assets also may be contributed to a Traditional IRA.

When can I use my Traditional IRA assets?

Unlike many employer-sponsored retirement plans in which access to assets might be limited until the participant has a change of employment or reaches retirement age, access to IRA assets is guaranteed, always. Most Traditional IRA distributions taken before the IRA owner reaches age 59½ are subject to a 10% early distribution penalty tax. This is to discourage people from taking Traditional IRA distributions at an early age rather than keeping the assets for retirement. The 10% early distribution penalty tax does not apply in the following situations:

• Age 59½
• Birth or adoption of a child (or an individual incapable of self-support) expenses
• Death
• Disability
• Medical expenses that exceed 7.5% of adjusted gross income
• Health insurance premiums following unemployment
• First home buyer expenses
• Higher education expenses
• IRS levy
• Series of substantially equal periodic payments
• Qualified reservist distributions
• Qualified disaster recovery distributions
• Terminal illness
• Domestic abuse (starting in 2024)
• Emergency expenses (starting in 2024)

IRS Publication 590-B, Individual Retirement Arrangements (IRAs), provides more detail on these penalty tax exceptions.

Am I ever required to take distributions from my Traditional IRA?

When IRAs were created, they were intended to encourage tax-deferred savings for retirement. IRA owners however, cannot use IRAs to permanently shelter assets from income tax. For this reason, a minimum amount must be distributed from your IRA each year once you reach a certain age called the required minimum distribution (RMD) age. 

The RMD age was increased from age 70½ to age 72. (Effective for distributions required in 2020 and later years for those who reach age 70½ in 2020 or a later year.) The Setting Up Every Community for Retirement Enhancement (SECURE) 2.0 Act of 2022 increased the RMD age again to age 73 in 2023 and to age 75 in 2033. 

Generally, you must begin taking RMDs from a Traditional IRA by April 1 of the year following the year you attain your RMD age. This date is often referred to as your "required beginning date," or RBD. After this date, you must continue to satisfy your RMD going forward by December 31 of each year. 

If you fail to take your RMD, you will be subject to a 25 percent excess accumulation penalty tax on the amount that should have been distributed but was not. If a failure to take your RMD is corrected in a timely manner, the penalty tax on the failure is further reduced from 25 percent to 10 percent. 

NOTE: Missed RMDs for tax years before 2023 were subject to a 50 percent excess accumulation penalty tax.

More information

To learn more about an existing retirement plan, opening an IRA, or moving your retirement assets, please contact the Retirement Services Department at 413.572.4282 or any of our convenient offices.