- A deductible IRA is form of a traditional IRA that allows you to reduce your modified adjusted gross income for every dollar you place into the IRA. The money grows tax deferred. You are allowed to take penalty free distributions after age 59 1/2, though you will add the distributed amount to your income when you do take the distribution.
- Income limits exist for investor to qualify for a complete or partial deductible contribution. A single person not covered by an employer-sponsored retirement plan has no income limit, but if that same filer becomes covered by a plan, he must make no more than $56,000 for a full deduction and between $56,000 and $66,000 for a partial deduction. Married couples not covered by an employer's plan must not make more than $169,000 for a full deduction and not more than $179,000 for a partial deduction. Those covered by a plan have contribution limits drop for single filers with thresholds at $56,000 to $66,000. Married couples have thresholds of $90,000 to $110,000 for full and partial deductions.
- There are two types of non-deductible IRAs: a traditional IRA and a Roth IRA. The non-deductible traditional IRA allows investors who don't qualify for a traditional deductible IRA to still get tax-deferred growth on earnings. The principal is after tax dollars so it won't be taxed a second time. A Roth IRA grows tax-free so long as investors hold it for five years and until age 59 1/2. Investors get no immediate tax benefit for contributing to a non-deductible IRA.
An investor needs to qualify with income to make a full Roth contribution. Within the threshold, investors can make a partial contribution but but contribute to a traditional non-deductible IRA if they do not qualify. The income limit thresholds for a married couple are the same as a traditional deductible IRA. A single filer has thresholds of $107,000 to $122,000 in annual income. - Early distributions are funds removed from the IRA prior to age 59 1/2 in a traditional IRA or before this age and before the five years in a Roth IRA. There is a 10 percent tax penalty for early distributions. A few exceptions to apply to the penalty. If the IRA owner dies, there is not penalty for the distribution. Accessing IRA funds if you become permanently disabled have penalties waived. An IRA owner can use the IRA to buy a first-home, using up to $10,000. The IRA may also be used without penalty for college tuition.
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