Traditional IRA

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:

• Compare Roth vs Traditional IRA
• Tax advantages
• Eligibility requirements
• Annual contribution limits
• Contribution timing
• Investment options
• Distribution guidelines
• Is your IRA deductible?

Compare Roth vs Traditional IRA

Which Type of IRA is better for me, Traditional or Roth? Comparison Chart or Flow Chart (PDF 132 KB) or Calculator.

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 Deductible contributions and earnings are subject to federal income tax when withdrawn.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

For 2007, you can make annual contributions to a Traditional IRA of up to $4,000 ($5,000 in 2008) or 100% of your earned income, whichever is less. An aggregate of $8,000 for 2007; $10,000 for 2008 can generally be contributed per married couple ($4,000 per IRA for 2007; $5,000 per IRA for 2008) provided that either you or your spouse has earned income of at least that amount. The $4,000/$5,000 and $8,000/$10,000 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.

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.

Investment options

• Annuities
• Bank - Fixed Rate CD
• Mutual Funds

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 (RMD) from your IRA by April 1 of the year following the year in which you reach age 70½. Calculate your Required Minimum Distribution (RMD).

Is your IRA deductible?

The amount of your annual contribution to a Traditional IRA that can be deducted from your federal income taxes is dependent on two factors:

• 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:

State Farm does not provide tax or legal advice. You should contact your tax or legal advisor for advice regarding your situation.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 276 KB).

¹ Distributions taken before age 59½ may be subject to a 10% premature distribution penalty tax.

AP2007/12/9699