What is a Traditional IRA?
A traditional IRA is an investment vehicle for retirement that allows you to contribute after-tax dollars to a tax deferred account on which you will not pay taxes on until you begin taking distributions at retirement; presumably in a lower tax bracket.
Who can contribute to a Traditional IRA?
Any person who earns an income is eligible to participate in the traditional IRA. Depending on your salary level and a couple other factors, you may or may not be able to deduct these contributions on your tax return. See the rules on this below.
You may not contribute to your IRA after you reach the age of 70 and 1/2.
Traditional IRA Contribution Limits
For the 2010 tax year, the contribution limits are $5,000 per person, $8,000 for a married couple. These maximums will increase to $5,000 and $10,000 for 2010. Now, if you are over the age of 50, you can add an extra $1,000 per year per person, therefore, making it $6,000 in 2010. This is commonly referred to as a "Catch Up" contribution. Married couples can contribute up to $12,000 cummulatively.
Now, one key point to remember is that the contributlon limit is the aggregate of your traditional IRA and Roth IRA contributions. For example, if you are 45 and you contribute $3,000 to your Roth IRA, you can only contribute $2,000 to your traditional IRA.
What are the Tax Advantages of a Traditional IRA?
If you fall within the modified adjusted gross income guidelines set by the IRS, you may deduct your traditional IRA contribution from your gross income.
If you are single and your adjusted gross income is below $56,000, the contribution is fully deductible. Between $56,000 and $66,000, the deduction is gradually phased out and for filers with an AGI of above $66,000, no deduction is allowed.
Married Filing Jointly
For those of you who are married and filing jointly, the phaseout range is $89,000 to $109,000. This means that if you both have an AGI below $83,000, you are eligible for a full deduction and if you AGI is more than $109,000 jointly, no deduction is allowed.
Making Investment Elections
The IRA is not an investment in itself. It is merely an account in which you can make investment elections. IRA's allow investment in stocks, bonds, CD's, mutual funds, and other investments such as real estate. IRA's, however, do NOT allow one to short a stock in the account. You are only allowed to buy shares and sell those shares. In order for you to profit on the short side in this account, you may want to look into some ETF's which bet on the market doing down. See our list of leveraged ETF's.