If you’re a physical therapist or occupational therapist looking to put some of your hard-earned money away towards your eventual retirement, a traditional IRA account can be a great option.
But before you jump to opening your own traditional IRA account, you should know important information pertaining to the traditional IRA plan.
This overview on the traditional IRA plan will get you started in the right direction by providing you with information on
- What a traditional IRA is
- Who is eligible for a traditional IRA
- Where you can open a traditional IRA account
- If you can have both a traditional IRA and Roth IRA
- How much you can contribute to a traditional IRA
- How long you have to make contributions to a traditional IRA
- When you can make withdrawals from a traditional IRA
- And much more. . .
Ready to learn about the traditional IRA plan?
Let’s get started.
What Is An IRA Plan?
An IRA is a type of retirement account where money you earn can be deposited and invested to hopefully grow and help financially prepare you for eventual retirement.
The term “IRA” is actually an acronym for “Individual Retirement Account.”
There are four types of IRAs:
- The Traditional IRA
- The Roth IRA
- The SEP IRA
- The SIMPLE IRA
Each of these are discussed in their own separate article, so this article will just focus on the Traditional IRA, but be sure to check out the other types of IRAs by clicking on their names mentioned earlier.
Who Is Eligible For An IRA?
In order to be eligible for a traditional IRA, you must pay taxes and have an earned income.
The phrase “earned income” is used to typically mean income that you generate from working at a job. The IRS considers both income from an employee job and income from a self-employed job as “earned income.”
The IRS does not count money you may collect from rental property, dividends, interest, or from pensions as earned income.
Can My Spouse Who Doesn’t Earn Income Have A Traditional IRA Account?
Yes!
But wait, didn’t we just cover earlier that you must earn income to be eligible to open an IRA account?
Yes, but the exception to this rule is if you earn income and your spouse does not but you are married and file taxes jointly, then your spouse can still have what is called a Spousal IRA account.
The Spousal IRA is actually not a type of IRA plan, it is still either a traditional IRA plan or a Roth IRA plan depending on which you choose. The term Spousal IRA is just a term used to describe that your non-working spouse’s IRA account exists based on the income that you earn. That said, your spouse is still the person who will own the Spousal IRA account, not you.
Your income does have to be greater than the combination of the contribution you will make to both your IRA account and your non-working spouses IRA account as well.
For example, if you want to contribute $5,000 to your Traditional IRA account and also contribute $5,000 to your non-working spouse’s Traditional IRA account, you need to make least $10,000 that same year.
How Do Taxes Work With A Traditional IRA?
The money you contribute to a traditional IRA is pre-tax. You can actually get a tax deduction on the amount of money you contribute to your Traditional IRA.
For example, if you contribute $5,000 to your traditional IRA, then your taxable income is decreased by $5,000.
However, you are not guaranteed to get a tax deduction. More on this in the section “How Much Can Be Contributed To A Traditional IRA?”
After you deposit money into your traditional IRA, you will decide how you want to invest it. Hopefully your money will grow over time and, as it does, you will not have to pay taxes on it. Even if you collect dividends from your investments, that money can be reinvested without you having to pay tax on it as long as it stays in your traditional IRA account.
When you are ready to withdraw money from your traditional IRA, which will likely be when you are retired, the money you withdraw will be taxed at your ordinary income tax rate for that year.
How Much Can Be Contributed To A Traditional IRA?
In 2023, the IRS allows you to contribute up to $6,500 to a traditional IRA. Each year the IRS decides if this amount will be changed to keep up with inflation.
One important rule regarding the contribution limit is that you typically cannot contribute more than your income. In other words, if you only made $3,000 in 2023 then you can’t contribute more than $3,000 to a traditional IRA account even though the annual contribution limit for 2023 is $6,500.
How Much Of My Traditional IRA Contribution Is Deductible?
Even though you can contribute up to $6,500 to a traditional IRA, you are not guaranteed to get a tax deduction on that full amount.
Let’s explore a few different scenarios to help you determine if you can get a tax deduction for contributing to a traditional IRA account in 2023. Each scenario will be influenced by whether or not you have an employer-sponsored retirement plan or lack thereof.
If You File Taxes As Single Or Married And You (And Also Your Spouse If You Are Married) Do Not Have An Employer-Sponsored Retirement Plan
If you are single and you don’t have a retirement plan from being an employee, such as a 401(k) or a 403(b), then you can contribute the maximum $6,500 to your traditional IRA in 2023 and all of that be tax deductible.
Likewise, if you file taxes as married and neither you or your spouse have a retirement plan from being an employee, then you can contribute the maximum $6,500 to your traditional IRA in 2023 and all of that be tax deductible.
If You File Taxes As Single And You Do Have An Employer-Sponsored Retirement Plan
If you work as an employee and you have access to an employer-sponsored retirement plan, such as a 401(k) or a 403(b), then your income amount will determine if and how much of your traditional IRA contribution is deductible.
Your income amount is calculated as what is known as your Modified Adjusted Gross Income (MAGI). This is just the value of your Adjusted Gross Income after accounting for certain tax deductions. Your tax professional can help you calculate your MAGI.
For year 2023, if your MAGI is
- $73,000 or less: You can deduct your entire traditional IRA contribution.
- Greater than $73,000 but less than $83,000: You can deduct part of your traditional IRA contribution.
- $83,000 or more: You cannot deduct any of your traditional IRA contribution
If You File Taxes As Married Filing Jointly And You Have An Employer-Sponsored Retirement Plan
If you work as an employee and you have access to an employer-sponsored retirement plan, such as a 401(k) or a 403(b), then your
MAGI will determine if and how much of your traditional IRA contribution is deductible.
For year 2023, if your MAGI is
- $116,000 or less: You can deduct your entire traditional IRA contribution.
- Greater than $116,000 but less than $136,000: You can deduct part of your traditional IRA contribution.
- $136,000 or more: You cannot deduct any of your traditional IRA contribution
If You File Taxes As Married Filing Jointly And Your Spouse Has An Employer-Sponsored Retirement Plan
If you work as an employee and you have access to an employer-sponsored retirement plan, such as a 401(k) or a 403(b), then your
MAGI will determine if and how much of your traditional IRA contribution is deductible.
For year 2023, if your MAGI is
- $218,000 or less: You can deduct your entire traditional IRA contribution.
- Greater than $218,000 but less than $228,000: You can deduct part of your traditional IRA contribution.
- $228,000 or more: You cannot deduct any of your traditional IRA contribution
If You File Taxes As Married Filing Separately And Either You Or Your Spouse Has An Employer-Sponsored Retirement Plan
If you work as an employee and you have access to an employer-sponsored retirement plan, such as a 401(k) or a 403(b), then your
MAGI will determine if and how much of your traditional IRA contribution is deductible.
For year 2023, if your MAGI is
- Less than $10,000: You can deduct part of your traditional IRA contribution.
- $10,000 or more: You cannot deduct any of your traditional IRA contribution
Can More Be Contributed To A Traditional IRA If I Didn’t Contribute Very Much Early On?
If you are 50 years or older, the IRS allows you to contribute an additional $1,000 to your traditional IRA in year 2023.
In other words, in 2023, you can contribute the maximum contribution of $6,500 plus an additional $1,000 for a total maximum contribution of $7,500.
Can I Have Both A Traditional IRA And A Roth IRA And Contribute To Both?
Yes, you can have both a traditional IRA and a Roth IRA. And if you have both, you can contribute to both.
Although you can contribute to both a traditional IRA and a Roth IRA, the combined amount that you contribute to both your traditional IRA and your Roth IRA cannot exceed that year’s annual limit.
For example, in 2023 you could contribute $3,000 to your traditional IRA and $3,500 to your Roth IRA for a combined total contribution of $6,500 since this matches the allowable annual contribution limit of $6,500 for year 2023.
Having a Roth IRA in additional to having a traditional IRA can provide a few advantages. Be sure to read more about what a Roth IRA offers so you can strategize most effectively for yourself.
When Can I Contribute To A Traditional IRA?
The IRS states that you have up until you pay taxes, April 15th of the following year, to contribute to your traditional IRA.
For example, you have up until April 15th in 2024 to contribute to your traditional IRA for year 2023.
Where Can I Open An IRA?
If you are eligible to open a traditional IRA, you can do so at most brokerage firms, banks, and credit unions.
Be sure to do your research on aspects including fees and investment options before deciding where to open a traditional IRA account.
Do All Traditional IRAs Have The Same Investment Options And Fees?
One of the strengths a traditional IRA account offers are many investment options. These typically include a wide variety of mutual funds, ETFs, stocks, and bonds.
And since you have the option to open your traditional IRA wherever you like, you can choose a company that fits your investment needs best.
For example, if you prefer low-cost investment options then you may want to consider Vanguard, Fidelity, or Charles Schwab.
If you prefer to have some guidance when investing, you can decide to invest in target-date funds. These are funds that attempt to invest your money at a risk tolerance that is based on your expected retirement date. Just know that target-date funds often have higher expense ratios compared to other low-cost investment options.
If you prefer having even more guidance, then you will want to open your traditional IRA account at a company that offers a robo-advisor. A robo-advisor can manage your investments for you, but this will come at a cost. Be sure to ask how much this fee is before deciding if you want to go this route.
Is The Money In My Traditional IRA Safe?
The Federal Deposit Insurance Corporation (FDIC) insures the total of your retirement account assets, including your traditional IRA balance, up to $250,000 only if your traditional IRA is at an FDIC insured bank.
Can I Take Out A Loan On My Traditional IRA?
No, you cannot take out a loan on your traditional IRA.
Are There Any Rules For Withdrawing Money From An IRA?
Taking A Standard Distribution
As mentioned earlier, since your initial traditional IRA contributions were not taxed, you will have to pay income tax on your withdrawals.
Additionally, if you withdraw money from your traditional IRA account before you turn 59 ½ years old, the IRS will call this as a “premature distribution” and can make you pay a 10% penalty on the amount you withdrew. The penalty payment that must be paid is in addition to the tax you will also owe.
There are exceptions to legally avoiding the 10% penalty. You can check out the link to the IRS website for an exhaustive list of qualified exceptions.
The Required Minimum Distribution
Once you turn a certain age, you must begin taking what are known as Required Minimum Distributions (RMDs) from your retirement account(s). These are withdrawals you must take from your traditional IRA account as required by federal law.
If you’re wondering how much you will have to withdraw, the U.S. Securities and Exchange Commission has a calculator you can use to determine the amount.
The age you must start taking Required Minimum Distributions was previously 72 years old. However, the SECURE Act 2.0 raised the age to now 73 years old beginning on January 1, 2023 and will also further raise this age to 75 years old beginning on January 1, 2033.
The SECURE Act 2.0 also decreased the penalty for failing to take a Required Minimum Distribution. Before the Secure Act 2.0, if you failed to take a Required Minimum Distribution, you would have to pay a federal penalty tax of 50% on the amount that you should have taken as a Required Minimum Distribution. However, the Secure Act 2.0 decreased this to now 25% and even includes an option to reduce it even lower to 10% if you correct your mistake in a “timely manner.”
Final Thoughts. . .
Overall, the traditional IRA can be a good secondary plan option to save and invest for your future retirement.
While the maximum contribution limit isn’t very high compared to some other retirement plan options, the traditional IRA can still be a solid supplemental retirement plan to pair with another retirement plan like a 401(k) or a 403(b).
Don’t forget, you can also open a spousal IRA if your spouse does not earn income. This can essentially double your traditional IRA retirement savings as a married couple.
And, like many other retirement accounts, the traditional IRA can provide important tax advantages as well. Just be aware that your income level could prevent you from getting a tax deduction on your traditional IRA contribution.
Perhaps my favorite aspect of the traditional IRA is that you can decide where you would like to open your account. This puts you in the driver’s seat as far as getting access to more investments options that align with your personal financial plans.
But before you go open your traditional IRA account, be sure to read about the Roth IRA so you can decide which might be better for you.
