A Traditional IRA is a tax-advantaged arrangement that allows earnings and deductible contributions to grow tax-deferred. That means you don't pay income taxes on the earnings and deductible contributions of your IRA until you begin taking withdrawals, usually after you retire and possibly are in a lower tax bracket.¹ Here's more information about Traditional IRAs:

Tax advantages

Contributions may be deductible from your gross income on your federal income tax return for the year in which the contributions are made. Earnings grow on a tax-deferred basis. Deductible contributions and earnings are subject to federal income tax when withdrawn.

Eligibility requirements

You must not attain the age of 70½ during the year you contribute to a Traditional IRA. You must also have earned income (compensation) in order to contribute to a Traditional IRA.

Annual contribution limits

In tax year 2005, you can make annual contributions to a Traditional IRA of up to $4,000 or 100% of your earned income, whichever is less. An aggregate of $8,000 can generally be contributed per married couple ($4,000 per IRA) provided that either you or your spouse has earned income of at least that amount. The $4,000 and $8,000 annual contribution limits apply to the combination of all of your Traditional and Roth IRAs.

If you are age 50 or older, you may make additional "catch-up" contributions to your IRA. Over the next several years, the maximum annual contribution amount will increase as shown in the table below.

Note: Additional "catch-up" contributions have been included in amounts shown for age 50 or older.

After 2010, the IRA limits are currently scheduled to return to the year 2001 levels, although some observers believe that future legislation may continue the increased limits.

Important: Please note that the states of New Jersey and Pennsylvania have not amended their income tax codes to conform with all of the changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001. If you are a resident of New Jersey or Pennsylvania, increased contribution limits may result in possible adverse state income tax consequences. It is important to verify your state's position on this conformity issue before making contributions to any tax-qualified plans.

Contribution timing

You can make annual contributions to a Traditional or Roth IRA from January 1st through the tax-filing deadline (excluding extensions) for the year, generally April 15.

Distribution guidelines

You may take distributions from a Traditional IRA starting at age 59½ -- distributions taken before then are subject to taxes and tax penalties, unless taken for a qualified exception. You may take distributions in specific amounts, as a lump sum, or as a series of systematic payments.

Distributions are taxed at ordinary income tax rates for the year the distribution was made. You are required to start taking distributions from your IRA by April 1 of the year following the year in which you reach age 70½.

The amount of your annual contribution to a Traditional IRA that can be deducted from your federal income taxes is dependent on two factors. These factors are whether or not you or your spouse participates in an employer sponsored retirement plan and the amount of your adjusted gross income as determined on your federal income tax return. The following scenarios should help you determine whether or not your contributions are deductible:

• If you (and your spouse) do not participate in an employer sponsored retirement plan, your contributions to a Traditional IRA are fully tax deductible, regardless of the amount of your adjusted gross income.
• If you (and your spouse) participate in an employer sponsored retirement plan, your adjusted gross income level will determine how much of your contribution is tax deductible. The following table should help you determine the deductible amount:
  
  

If you are married and you and your spouse file a joint income tax return, and you are not an active participant in an employer-sponsored retirement plan, but your spouse is, deductibility of your Traditional IRA contributions is dependent upon your combined adjusted gross income as described below: