All About Traditional IRAs

Apr 11, 2013

By Staff writer State Farm™ Employee

The Individual Retirement Arrangement (IRA) was the first retirement savings plan offering tax breaks to individuals. It was created by law in 1974 and has allowed millions of people to prepare for retirement. Congress has since passed laws creating other versions of IRAs, so the original style is now known as a Traditional IRA.

With a Traditional IRA, you make contributions from income earned at your job or your spouse's job. The money can be used for such investments as annuities, bank CDs or mutual funds. For some people, those contributions are deductible from federal income taxes if they make the contribution before the tax filing deadline. That means contributions for any one year can be made between January 1 and the tax filing deadline of the following year. Money that the IRA account earns from interest, dividends, or capital gains is generally not taxed until the funds are withdrawn. Although deductible contributions and earnings are subject to federal income tax when withdrawn, many people find that they are in a lower tax bracket when they are retired than when they were working.

For 2013 and 2014, an individual younger than age 50 can contribute up to $5,500 or 100 percent of earned income to a Traditional IRA, whichever is less. For those 50 and above, an additional $1,000 can be contributed so their maximum contribution goes up to $6,500. For a married couple, the maximum is $11,000; $5,500 for each of you; or 100 percent of combined earned income, whichever is less. It is important to note that no matter how many Traditional and/or Roth IRA accounts you have, you may only contribute up to the annual maximum of $5,500 ($6,500 if over 50) per person per year.

To be eligible to contribute to a Traditional IRA, you must be younger than age 70, and either you or your spouse must have earned income. That part is simple. The eligibility rules for taking an IRA deduction are more complicated and depend on two factors: whether you or your spouse has a retirement plan at work, and what your total adjusted gross income is.

If neither you nor your spouse has a retirement plan at work, then you can take a federal income tax deduction for your Traditional IRA contribution no matter how high your adjusted gross income is. If one or the other of you has an employer retirement plan, you may still be able to take a deduction.

If you (and your spouse) participate in an employer sponsored retirement plan, your adjusted gross income level will determine how much of your contribution is tax deductible. The following table should help you determine the deductible amount:

Adjusted Gross Income

Your Tax Filing Status Tax Year Full Deduction Partial Deduction No Deduction
Single/Head Of Household 2013 Up To $59,000 $59,000 - $69,000 Above $69,000
Single/Head Of Household 2014 Up To $60,000 $60,000 - $70,000 Above $70,000
Married Filing Jointly 2013 Up To $95,000 $95,000 - $115,000 Above $115,000
Married Filing Jointly 2014 Up To $96,000 $96,000 - $116,000 Above $116,000
Married Filing Separately 2013 N/A $0 - $10,000 Above $10,000
Married Filing Separately 2014 N/A $0 - $10,000 Above $10,000

If you are married and you and your spouse file a joint income tax return, and you are not an active participant in an employer-sponsored retirement plan, but your spouse is, deductibility of your Traditional IRA contributions is dependent upon your combined adjusted gross income as described below:

Combined Adjusted Gross Income

Tax Year Full Deduction Partial Deduction No Deduction
2013 Up To $178,000 $178,000 - $188,000 Above $188,000
2014 Up To $181,000 $181,000 - $191,000 Above $191,000

These accounts were designed for retirement, so there is a 10 percent penalty tax charged if you take withdrawals before turning 59 unless the withdrawal falls into a qualified exception. The list of exceptions includes but is not limited to withdrawals upon death, disability, or first time home purchase ($10,000 lifetime limit).

After turning 59, you can take out as much money as you like without a penalty tax. Beginning April 1 of the year after you turn 70, you have to take out at least the amount of the Required Minimum Distribution, which is a percentage of the account based on average life expectancy. If you are 70, for example, your IRA distribution is based on the assumption that you have an average life expectancy of 27.4 more years, so you must take out 1/27.4 of your account, or 3.6 percent.

Neither State Farm nor its agents provide investment, tax, or legal advice. Please consult your own adviser regarding your particular circumstances.

Risks Disclosures

Before investing, consider the funds' investment objectives, risks, charges and expenses. Contact State Farm VP Management Corp (1-800-447-4930) for a prospectus or summary prospectus containing this and other information. Read it carefully.

Securities, insurance and annuity products are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.

AP2014/02/0316

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