A traditional IRA is a retirement account in which you can contribute up to $4,000 in 2007 if you are under age fifty; if you are over age fifty, you may contribute $5,000 in 2007 (see Table 1). This account may or may not be tax-deferred, depending on your income level and whether or not you are a participant in another employer-sponsored retirement plan (ESRP). To contribute to a traditional IRA, you must be younger than seventy and a half, and you must have earned income yourself or you must be the spouse of someone who has earned income.

Table 1 Traditional and Roth IRA Annual Contribution Limits

Year	Contribution Limit	Catch-Up Contributions*
2004	$3,000	$500
2005	$4,000	$500
2006	$4,000	$1,000
2007	$4,000	$1,000
2008	$5,000	$1,000
2009	$5,000	Indexed

* The catch-up contribution is for individuals over age fifty.

Contributions to a traditional IRA are tax-deductible if you meet certain conditions. If you are single, or if you are married and neither spouse is an active participant in an ESRP, your traditional IRA contributions are tax deductible regardless of income. If you or your spouse is an active participant in an ESRP, you may deduct contributions only if your income is below a certain level (see Table 30.2). For example, you may deduct the full $4,000 contribution on your income tax return if you do not have an ESRP. You may also deduct the full $4,000 if you have an ESRP but your modified adjusted gross income (AGI) is $75,000 or less for a joint return or $50,000 or less for a single return. A spouse who does not have an ESRP may make tax-deductible contributions of up to $4,000 if his or her joint AGI is $150,000 or less. Taxes are deferred on earnings from a traditional IRA.

You must make withdrawals from a traditional IRA after you reach age fifty-nine and a half, and you may use the money for any purpose. Before you reach this age, your withdrawals are subject to federal penalties of 10 percent unless you use the withdrawals to pay for your first home (limit $10,000), death or disability expenses, annuity payments, or medical expenses greater than 7.5 percent of your AGI. Federal law requires that you begin making withdrawals by April 1 of the year after you turn seventy and a half.

When saving for retirement, remember that the benefit of deferred taxes is offset by the fact that you must eventually pay taxes on your principal and earnings. Traditional IRA plans that defer taxes require that minimum distributions must begin by April 1 of the year following age seventy and a half. The distribution amount is calculated by dividing the account balance on December 31 of the previous year by the life expectancy. Note that there is a 50 percent penalty on minimum distributions that are not taken (see Table 8, reposted here for convenience).

 

Table 8: Life Expectancy and Age

Age	Life Expectancy (LE)	Age	LE
70	27.4	75	22.9
71	26.5	76	22.0
72	25.6	77	21.2
73	24.7	78	20.3
74	23.8	79	19.5