Contributions to a Traditional IRA are a maximum of $3,000 for a single individual or $6,000 for married couples filing a joint return. These contributions are made with “pre-taxed dollars”, which means you are taxed on the total dollar amount at the time of withdrawal. Your contributions grow tax-free until you begin withdrawing the money. You may continue contributing to your Traditional IRA until age 70.5, at which time you are required to begin withdrawing.
(Click here for 2002 updated changes)
Because a Traditional IRA is a tax-favored means of saving for your retirement, there are rules limiting the withdrawal and use of your IRA assets. Generally, if you are under age 59.5 and you withdraw money from your Traditional IRA, you must pay a 10% penalty, (you may have to pay 25% rather than 10% if you withdraw early from a simple IRA). Withdrawals before you are age 59.5 are called premature distributions or early withdrawals. However, there are exceptions to this rule:
1. You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income
2. The distributions are not more than the cost of your medical insurance
3. You are disabled
4. You are the beneficiary of a deceased IRA owner
5. You are receiving distributions in the form of an annuity
6. The distributions are not more than your qualified higher education expenses
7. You use the distributions to buy, build, or re-build a first home
8. The distribution is of contributions returned before the due date of your tax return
9. The distribution is due to an IRS levy of the qualified plan
After age 59.5, you can withdraw money from your Traditional IRA without having to pay the 10% additional penalty. Even though you can make withdrawals, you do not have to withdraw any money from your IRA until you reach age 70.5.
If you are the owner of a Traditional IRA, you must withdraw the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following in which you reach age 70.5. If you do not withdraw the entire balance in your Traditional IRA by the required beginning date, you must start to withdraw periodic distributions over one of the following periods:
1. Your life
2. The lives of you and your designated beneficiary
3. A period that does not extend beyond your life expectancy
4. A period that does not extend beyond the joint life and last survivor expectancy of you and your spouse
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