Individual Investor
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Traditional IRA

A traditional individual retirement account (IRA) is a tax-advantaged investment account that allows you to contribute to your retirement. In some cases, you can deduct your contribution from your current income taxes, deferring payment of those taxes until you make a withdrawal from your IRA.

Traditional IRA features:

  • You can contribute each year up to the IRS defined limit or 100% of your earned income, whichever is less.
  • Traditional IRAs offer tax-deferred growth and your contributions may be tax-deductible.
  • If you participate in a workplace retirement plan, the ability to deduct your contributions is based on your income (see details under Eligibility).
  • You can begin withdrawing money as early as age 59½ and must begin taking distributions by age 70½.
  • You can make catch-up contributions at age 50 and older and can no longer contribute after age 70½.

Things to consider:

  • Withdrawals are taxable and included with your yearly income.
  • There is a 10% early withdrawal penalty on distributions taken before age 59½ (some exceptions apply).
  • Required minimum distributions (RMDs) begin at age 70½.

Contribution limits—2017 tax year:

  • Individuals under age 50 can contribute up to $5,500.
  • Individuals age 50 and older can make an additional catch-up contribution of $1,000.

Individuals who have earned income and their spouses, if married filing jointly, can contribute to a traditional IRA up until the year in which they turn 70½. With a traditional IRA, you may be able to deduct your contributions on your taxes. Your eligibility to deduct is based on your modified adjusted gross income (MAGI) and whether you or your spouse participate in a retirement plan at work.

For the 2017 tax year, if you (and your spouse) are not covered by an employer-sponsored plan, contributions to a traditional IRA are:

  • Fully deductible at all income levels

For the 2017 tax year, if you are covered by an employer-sponsored plan, contributions to a traditional IRA are:

  • Fully deductible if your MAGI is less than $62,000 (single) or $99,000 (married filing jointly)
  • Partially deductible if your MAGI is between $62,000 and $72,000 (single) or $99,000 and $119,000 (married filing jointly)
  • Not deductible if your MAGI is over $72,000 (single) or $119,000 (married filing jointly)

For the 2017 tax year, if you are not covered by an employer-sponsored plan but your spouse is and you are filing jointly, contributions to a traditional IRA are:

  • Fully deductible if your MAGI is less than $186,000
  • Partially deductible if your MAGI is between $186,000 and $196,000
  • Not deductible if your MAGI is greater than $196,000

The IRS provides guidelines about claiming a tax deduction for your traditional IRA contributions. Note that even if your contribution is not deductible, an after-tax contribution to a traditional IRA can still be a great way to invest for tax-deferred growth potential.

Once you start taking money from your IRA, withdrawals are taxed as ordinary income. If you make withdrawals before age 59½, you may be charged a 10% early-withdrawal penalty. There are a few exceptions that allow you to avoid the 10% penalty. Those exceptions include:

  • Disability
  • Qualified first-time homebuyer ($10,000 lifetime limit)
  • Qualified higher-education expenses
  • Qualified military reservist
  • Medical expenses in excess of 10% of adjusted gross income
  • Health insurance premiums for certain unemployed individuals
  • Substantially equal periodic payments
  • Death

While these exceptions allow you to withdraw money early without the 10% IRS penalty, you will generally pay taxes on any amount withdrawn from your traditional IRA.

 
 

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Any tax or legal information on this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Wells Fargo Funds Management, LLC; Wells Fargo Funds Distributor, LLC; or any of their representatives may not give legal or tax advice.

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