A Traditional IRA is one way to set money aside for retirement. Anyone under age 70½ with earned income may contribute. Depending on your income, filing status, and other factors, your contributions may be tax deductible and, therefore, a Traditional IRA could lower your taxes now. But even if you can't deduct your contributions, they'll accumulate on a tax-deferred basis as long as they remain in the account. Tax-deferral may also reduce current taxes and enhance the after-tax return on your investment.

You may withdraw money from your Traditional IRA without penalty if you: have attained age 59½, become disabled, are a first-time homebuyer, incur certain non-reimbursed medical expenses, face qualified higher-education expenses, or take substantially equal periodic payments based on your life or life expectancy (or the joint lives or joint life expectancies of you and your designated beneficiary). Non-qualified distributions may carry a 10% early withdrawal penalty. 

Any individual with earned income can contribute to a Traditional IRA, provided the account holder won't reach age 70½ by the end of the year the contribution is made. 

For the 2009 tax year, you can generally contribute up to your taxable compensation or $5,000, whichever is less. Contributions for the 2008 tax year can be made through April 17, 2009—the contribution amount is the lesser of $5,000 or your taxable compensation. This is a combined limit for Traditional and Roth IRAs, so if you contribute to a Roth IRA during the same year, the amount you can contribute to a Traditional IRA will be lowered accordingly.

If you're eligible for a Spousal IRA, you may be able to contribute as much as $5,000 (for 2009), bringing the combined limit for you and your spouse to $10,000. Your Spousal IRA contribution limit may be lower, depending on your combined taxable income, your spouse's Traditional IRA contributions, and any contributions you and your spouse may make to Roth IRAs.

Contribution Limit Schedule:
The contribution limit to your traditional IRA for 2009 will be increased to the smaller of the following amounts:

• $5,000, or
• Your taxable compensation for the year.
  

If you were age 50 or older before 2009, the most that can be contributed to your traditional IRA for 2008 will be the smaller of the following amounts:

• $6,000, or
• Your taxable compensation for the year.
  

Federal and state tax laws may differ. Please consult your tax advisor.

Three factors affect whether or not your contributions are deductible:

• Your income
• Your filing status
• Whether or not you are covered by a retirement plan at work
  

Single Head of Household

Married Filing Jointly or Qualifying Widow(er)

Married Filing Jointly

Married Filing Separately³

¹ Includes dollar limitations for 2008.
² Even if your spouse is not covered by a plan at work.
³ If you did not live with your spouse at any time during the year, your filing status is considered as
   Single for this purpose, and you should refer to the table for Single, Head of Household above.

You can still contribute to a Traditional IRA, even if you or your spouse is covered by a retirement plan at work.

Depending on your income and filing status, being covered by a retirement plan at work may impact how much of your Traditional IRA contributions, if any, will be deductible.

Contributions may be deducted from gross income in the year the contribution is made. Nondeductible contributions receive no special tax treatment. Once your money is in a Traditional IRA, any earnings accumulate on a tax-deferred basis. This means that, subject to certain limitations, no current taxes apply to earnings, as long as the money stays in the IRA.

When distributions are taken from a Traditional IRA, earnings and deductible contributions are taxed as ordinary income at tax rates applicable at the time of distribution. If you made nondeductible contributions, they are not taxed when they are distributed to you. With certain limited exceptions, distributions prior to age 59½ may be subject to a 10% early withdrawal penalty.  

A phase-out range is a span of incomes within which contributions by certain individuals may be restricted as to eligibility or deductibility. In a Traditional IRA, phase-out ranges may play a role in determining how much, if any, of your contributions you may deduct. As modified AGI (adjusted gross income) approaches the upper limit of a phase-out range, the amount you can deduct decreases. If your modified AGI is above the phase-out range, you may still make IRA contributions, but they will be entirely nondeductible.

Whether or not a phase-out range applies to you depends on your income, filing status, and/or whether or not you and your spouse are covered by a retirement plan at work. Your professional tax advisor can help you determine how much of your contributions are deductible and nondeductible if a phase-out range applies.

A Spousal IRA is a way for certain individuals with little or no taxable compensation to contribute to a Traditional IRA. If you file a joint return and your taxable compensation is less than that of your spouse, you may contribute for 2009 up to the lesser of: 1) $5,000 or 2) the total compensation you and your spouse include in gross income, less any contributions your spouse makes to Traditional or Roth IRAs.

Example Using 2009 Limits
John has decided to take a year off from his university career to study ancient artifacts. His wife continues to work and earns $30,000 in taxable compensation during the year. His wife contributes $5,000 to a Traditional IRA. Even though John has no earnings for the year, since he and his wife file jointly, he can contribute up to $5,000 to a Spousal IRA ($30,000 in taxable compensation minus his wife's $5,000 contribution to a Traditional IRA equals $25,000; $5,000 is less than $25,000).

Contribution Limit Schedule
As mentioned previously in this section, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provides for increases in contribution limits over the next several years. The limits for Traditional and Roth IRAs also apply to Spousal IRAs:

• $5,000, or
• Your taxable compensation for the year.
  

If you were age 50 or older before 2009, the most that can be contributed to your spousal IRA for 2008 will be the smaller of the following amounts:

• $6,000, or
• Your taxable compensation for the year.
  

Federal and state tax laws may differ. Please consult your tax advisor.

Generally speaking, you may take money out of a Traditional IRA without penalties beginning at age 59½. Earlier withdrawals may be subject to a 10% penalty, but there are a number of exceptions. Withdrawals related to disability, certain medical expenses or medical insurance costs, qualified higher-education expenses, first home purchases (up to $10,000), and certain other distributions are not subject to the 10% early withdrawal penalty.  

You cannot leave your money in a Traditional IRA indefinitely. Beginning by April 1 following the year you turn age 70½, minimum distributions are required and substantial penalties may apply if you fail to take appropriate amounts out of your IRA each year. Your tax professional can help you determine the amount you must withdraw to meet the minimum distribution requirements.

The prior minimum distribution rules (before final regulations took effect on January 1, 2003) required taxpayers to choose an irrevocable calculation method, using one of three complex formulas. The new rules make the calculation process easier by providing one uniform distribution period table for all individuals. This uniform distribution period stretches out the lifetime distribution period for most people, resulting in a reduced annual required minimum distribution. The new rules also eliminate the need to make an irrevocable election. View the new IRS Uniform Life Expectancy table below to see how your calculation compares.¹

Uniform Life Expectancy Table
Effective for distribution years beginning in 2002

This table should be used for calculating lifetime distributions only.

To understand how the table is used, consider the circumstances of a 73 year-old man with an IRA account balance of $500,000. Using the Uniform Life Expectancy Table he would be required to take a minimum distribution of $20,243 ($500,000 ÷ 24.7).

¹ This table is used for determining the distribution period for lifetime distributions to an account holder in situations in which the account holder's spouse is either not the sole designated beneficiary or is the sole designated beneficiary but is not more than 10 years younger than the account holder. Where the spouse is the sole designated beneficiary and is more than 10 years younger than the account holder, a joint life and last survivor life expectancy table is used. (Treas. Reg. 1.401(a) (9)-9).

Generally speaking, you will not face penalties if you make appropriate contributions, leave your money in your IRA until you reach age 59½, and take the appropriate minimum distributions after age 70½.

Your IRA will become fully taxable in certain prohibited transactions, which include borrowing money from your IRA, using your IRA as security for a loan, or using IRA funds to buy property for personal use. Other penalties may apply if you use IRA funds to invest in collectibles or if you make excess contributions, take early withdrawals, or fail to meet minimum distribution requirements.  

You can roll money from one Traditional IRA into another. You can also roll money from a qualified retirement plan into a Traditional IRA, if you are eligible to receive a distribution from the plan due to retirement, separation of service, plan termination, or if another event makes it possible to take a distribution from the plan. Additionally, the Economic Growth and Tax Relief Reconciliation Act of 2001 allows pre-tax/deductible IRA contributions, plus any earnings, to be rolled from an IRA into a qualified plan that accepts rollovers, including 457(b) plans maintained by state or local governments, 401(a) plans, 403(a) qualified annuity plans, and 403(b) plans. This law also allows employee after-tax contributions from a qualified plan to be rolled over into an IRA or a 401(a) defined contribution plan.

Generally speaking, there are two ways to make a rollover from an existing retirement plan—you may arrange a direct rollover into an IRA or accept payment and roll the money over yourself. With a direct rollover, the money is transferred directly into an IRA. There are no withholding requirements, no penalties, and no portion of the rollover will be included in income in the year the money is transferred.

If you accept payment, you have 60 days to roll the money over into an IRA. Regardless of whether you do so, however, your employer must withhold income tax of 20% on the taxable part of the distribution. Any taxable part of the distribution that is not rolled over will be included in income in the year it is received and may be subject to a 10% early withdrawal penalty if you are under age 59½. To make a complete rollover, you need to supply from your own funds an amount equal to the 20% withheld by the payer. For this reason, a direct rollover may be a more convenient and cost-effective way to roll over retirement plan assets.

For more information about Traditional IRA provisions, distributions, and taxes, please consult with your tax advisor.

Neither New York Life Investment Management LLC nor its representatives provide legal, tax, or accounting advice—please contact your own advisors.