This is a first of a series of articles that explain these different plans.
The traditional IRA (also called a regular IRA) is probably the most well-know retirement plan. Here are its main components:
Eligibility: You are eligible to contribute to a traditional IRA if you are not covered by an employer's retirement plan (whether you are single or married). If you are eligible to be covered by an employer's retirement plan, you are eligible to contribute to a traditional IRA if you make less than $66,000 (single), or $110,000 (married, filing jointly). These are income limits for 2011.
In other words, if you are married and your husband has a 401(k) plan at his work, you could still set up and contribute to a traditional IRA for yourself. In addition, your spouse could contribute to his own traditional IRA, as long as your business profit and his gross income combined are less than $110,000.
Contribution limits: You may contribute up to $5,000 of your profit each year, or up to $6,000 each year if you are age 50 or older. (These are 2011 limits.) You don't have to contribute the maximum each year. Many investment funds allow you to set up an IRA for less than $1,000.
Deadlines: You can set up a traditional IRA before April 16, 2012, or before October 15, 2012 if you file a tax extension. The sooner in the year you contribute to your IRA, the more interest it will earn.
Tax deductibility and deferral: Contributions to a traditional IRA are tax deductible. When you withdraw money after age 59 1/2, you will owe income tax on both your contributions and your earnings on your investment.
I will discuss other IRA options in future articles: the Roth IRA, SIMPLE IRA, SEP IRA, and the self-employed 401(k) plan.
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I've written much more about IRAs in my book Family Child Care Money Management and Retirement Guide.