A Traditional IRA is a retirement plan that allows you to save money for retirement. In the case of a traditional IRA, you may also be offered an immediate tax shelter for the contributions that you make to your account. In order to make a contribution to a traditional IRA, you really only need to pass two tests or rules. The first has to do with age - you must be under the age of 70 1/2 at the end of the calendar year. After age 70 1/2, you're no longer eligible to contribute to a traditional IRA. The second eligibility test has to do with compensation. In order to contribute to a traditional IRA, you must have some form of compensation. Compensation includes wages, salaries, bonuses and commissions. Compensation does not include deferred compensation or payments such as interest income and stock dividends you might have received during the year. The IRA is held at a custodian such as a bank or brokerage, and may be invested in anything that the custodian allows (for instance, a bank may allow certificates of deposit, and a brokerage may allow stocks, bonds, mutual funds, etc.). The only criterion for being eligible to contribute to a Traditional IRA is sufficient income to make the contribution. However, the best provision of a Traditional IRA the tax-deductibility of contributions has strict eligibility requirements based on income, filing status, and availability of other retirement plans. Transactions in the account, including interest, dividends, and capital gains are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal income tax. The traditional IRA also has restrictions on withdrawals. Within the traditional IRA, transactions inside the account (including capital gains, dividends, and interest) incur no tax liability. All traditional IRA s can be self-directied by the individual at any time. A Self-Directed Individual Retirement Account is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner. Generally the trustee/custodian will maintain the assets and all transaction and other records pertaining to them, file required IRS reports, issue client statements, assist in helping clients understand the rules and regulations pertaining to certain prohibited transactions, and perform other administrative duties on behalf of the Self-directed IRA owner for the life of the IRA account. Self-directed IRA accounts are typically not limited to a select group of asset types (e.g., stocks, bonds, and mutual funds), and most truly self-directed IRA custodians will permit their clients to engage in investments in most, if not all, all of the IRS permitted investment types (an almost unlimited array of possibilities including foreign real estate). Some of the additional
investment options permitted under the regulations include, but are not limited to, real estate, stocks, mortgages, franchises, partnerships, [private equity] and tax liens. Self-directed IRAs, by allowing a wide range of investment choices, improve the account owner's opportunities to diversify their IRA portfolio(s). Some investments, such as life insurance or collectibles as defined by the Internal Revenue Service, are not permitted in IRAs. Also, if real estate or any other investment asset held in a selfdirected IRA has been employed for personal use, or to gain any other personal benefit (other than a return for the IRA), in the view of the IRS or the Department of Labor, the IRA(s) may become immediately taxable. In addition, if the IRA owner is younger than 59 1/2, the IRA will be subject to an early withdrawal penalty of 10%. It is important, therefore, that those interested in self-directed IRAs work with qualified and experienced IRA custodians. Starting at age 70 1/2, traditional IRAs also have minimum required distributions. This is money that the IRS expects you to remove from your account each year starting at age 70 1/2. If you do not take your minimum required distribution from your IRA, the amounts not withdrawn are subject to an additional 50% tax penalty. Traditional IRA s Contribution rules- The main advantage of a Traditional IRA, compared to a Roth IRA, is that contributions are often tax-deductible. If a taxpayer contributes $4,000 to a traditional IRA and is in the twentyfive percent marginal tax bracket, then a $1,000 benefit ($1,000 reduced tax liability) will be realized for the year. An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA is a prohibited transaction and could potentially disqualify the beneficial tax treatment. Because qualified distributions are taxed as ordinary income (the taxpayer's highest rate), the long-term benefits of the traditional IRA are only comparable to those of a Roth IRA (whose qualified distributions are tax free) if the current year tax benefit ($1,000 above) is reinvested.
Year Age 49 and Below Age 50 and Above 2005 $4,000 $4,500 2006 2007 $4,000 $5,000 2008 $5,000 $6,000 2009 There are eligibility requirements for the tax-deductibility. If one is eligible for a retirement plan at work, one's income must be below a specific threshold for your filing status. Also, the ability to deduct contributions will depend on specific income limits as listed below: Married Filing Jointly or Qualified Widow and Modified Adjusted Gross Income is between $75,000 and $85,000 (this is scheduled to rise to $80,000 to $100,000 in 2007) Married Filing Separately (and you lived with your spouse at any time during the year) and modified AGI is between $0 and $10,000 Single, Head of Household or Married Filing Separately (and you did not live with your spouse) and modified AGI is between $50,000 and $60,000
Investment Rules The lower number represents the point at which the taxpayer is still allowed to deduct the entire maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to deduct at all. The deduction is reduced proportionally for taxpayers in the range. Note that people who are married and lived together, but who file separately, are only allowed to deduct a relatively small amount. Anybody can still contribute the maximum amount to an IRA, regardless of income. However, you will not receive any tax benefits for the contributions. Traditional IRA accounts are typically not limited to a select group of asset types (e.g., stocks, bonds, and mutual funds), and most truly self-directed IRA custodians will permit their clients to engage in investments in most, if not all, all of the IRS permitted investment types (an almost unlimited array of possibilities including foreign real estate). Some of the additional investment options permitted under the regulations include, but are not limited to: Real estate Stocks and stock derivatives (options and Futures) Mortgages Franchises Partnerships LLC s Private equity Tax liens Self-directed IRAs, by allowing a wide range of investment choices, improve the account owner's opportunities to diversify their IRA portfolio(s). Some investments, such as life insurance or collectibles as defined by the Internal Revenue Service, are not permitted in IRAs. Also, if real estate or any other investment asset held in a self-directed IRA has been employed for personal use, or to gain any other personal benefit (other than a return for the IRA), in the view of the IRS or the Department of Labor, the IRA(s) may become immediately taxable. There are only a handful of investments that are not permitted by the IRS. The rule is that you cannot benefit personally from the investments in the IRA. The investments are solely for the growth of the IRA account. Here are some investments the IRS deem unqualified for retirement accounts: Artwork Antiques Gems Some Coins Life Insurance Contracts Stock in a S-Corporation
Alcoholic Beverages Stamps Some Metals Rugs And certain other tangible personal property In the Stock Market, there will be three stragies we teach that are not allowed in IRA accounts. They are: Using margin Shorting stock Selling naked calls All other strategies taught by Wealth Intelligence Academy can be used and employed in Individual Retirement Accounts as long as the custodian holding the account allows the use of these strategies as well. Distribution Rules Although funds can be distributed from an IRA at any time, there are limited circumstances when money can be distributed, or withdrawn from the account, without penalties. Unless an exception applies, money can typically be withdrawn penalty free as taxable income from an IRA once the account owner reaches age 59 and a half. There are exceptions to the rules that allow an individual to withdraw money from the IRA without penalty before 59 ½. Each exception has detailed rules that must be followed to be exempt from penalties. The exceptions include: Unreimbursed medical expenses (more than 7.5% of adjusted gross income) Disability Early retirement (Substantially equal periodic payments) Higher education expenses of the owner, their children, or grandchildren Buying or building a first home Distributions to the IRS Upon reaching 59 ½, the IRA owner may begin withdrawing any amount from the IRA account. Any money withdrawn is treated as taxable income and will be included in the individual s current year tax return. The money will be taxed at the individual s current tax rate. Forced Distributions Account owners must begin taking distributions of at least the calculated minimum amounts by April 1st of the year after reaching age 70 ½. If the minimum distribution is not taken the penalty is 50% of the amount that should have been taken. The amount that must be taken is calculated based on a factor taken from the appropriate IRS table and is based on the life
expectancy of the account owner and possibly their spouse as beneficiary if applicable. At the death of the account owner distributions must continue and if there is a designated beneficiary, distributions can be based on the life expectancy of the beneficiary.