Is a Traditional IRA Right for Me?

Conditions

An IRA is available to anyone who meets the conditions established by the Internal Revenue Service. According to the IRS, you are eligible to establish a traditional IRA if you file a single or joint income tax return and make taxable income. In addition, you must be under 70 1/2 years of age to qualify for an IRA.

The IRS also limits the amount of money you contribute to your traditional IRA every year based on your income. Since 2009, you can contribute a maximum of $5,000 annually if you are age 50 or younger and made more than $5,000 in income. If you are age 50 or older, the maximum limit on your IRA contribution increases to $6,000 every year, provided you make at least $6,000 in income. In both cases, the maximum contribution amounts are not requirements since you can decide not to contribute anything at all to your traditional IRA.

The IRS grants a deduction on your federal income tax return equal to the amount of your contribution to a traditional IRA. The effect on your tax return is a smaller amount of taxable income and a smaller tax bill. For example, you would be able to deduct $4,000 if you contributed $4,000 to your IRA during the tax year, decreasing your taxable income by $4,000.

The rules in place for 2010 limit the amount of money you can deduct on your federal income tax return from contributions to a traditional IRA if you have a high income. For example, you are not allowed to take the IRA contribution deduction at all if your annual income is more than $177,000. If you are a single filer and you are not covered by an employer-sponsored retirement plan, you cannot take a deduction for your contribution if you make more than $65,000 or over $109,000 for married couples filing jointly.

You can voluntarily withdraw money from your IRA at any time, but you are charged a 10 percent tax on the amount of your withdrawal if you do so before you reach 59 1/2 years of age. The IRS also indicates that you must begin withdrawing money by the time you reach the age of 70 1/2.