A traditional deductible
IRA
allows you to
subtract your annual contribution to your account from your taxable
income. Anyone who doesn't have a retirement plan through his
or her employer is qualified to open a traditional deductible
IRA. And even if you have a
401(k) or other employer-sponsored
plan, you can deduct the full amount of your contribution — or a portion of it — if your AGI is less than a predetermined
amount.
For example, if you are a single tax filer
and your AGI is less than $53,000 in 2008, you can deduct the
full $5,000 you're entitled to contribute. If your AGI is less
than $63,000, you can deduct part of the $5,000 maximum contribution.
For married joint filers, the limits are $85,000 for full deduction,
and $105,000 for a partial deduction.
Income limits to qualify for a deduction are indexed to inflation.
If you're eligible for a deductible IRA, your earnings
on investments in that account are tax deferred, which means you
don't owe any tax on them until you withdraw money. You reinvest
any earnings, which lets your money accumulate faster than if
you needed to use some of it to pay taxes each year.
You're required to begin withdrawing money from
a traditional deductible IRA by the time you turn 70 1/2, and
you must take at least the required minimum each year.
Your
AGI,
or
adjusted
gross income,
is calculated by subtracting
any special deductions — tuition, interest on
student loans, moving expenses, and contributions
to an
IRA,
for example — from your gross
income, including your salary and investment earnings.
