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Traditional IRA.

This is another name for the original (regular) individual retirement arrangement that was first made available in 1974 under the Employee Retirement Income Security Act (ERISA). Under this Act, the primary purpose of the Individual Retirement Account, or IRA, was to give those individuals not covered by an employer's retirement plan the opportunity to save for retirement on their own by establishing tax-deferred accounts with private financial institutions. Additionally, the IRA was also intended to provide a place for transferring, or rolling over, balances from employer-sponsored retirement plans; thus giving both retiring workers and individuals who were changing jobs a way to preserve their employer-sponsored retirement plan assets.

In Publication 590 (Individual Retirement Arrangements (IRAs)), the Internal Revenue Service defines a traditional IRA as "any IRA that is not a Roth IRA or a SIMPLE IRA" (i.e., the term is used to distinguish the original IRA from the Roth IRA and the SIMPLE IRA). See the expanded discussion of the traditional IRA on page 445.

In contrast to the traditional IRA, the SIMPLE IRA must be established for employees by an employer. It is not limited to the traditional IRAs $5,000 per year contribution limit. In 2009 and 2010, with a SIMPLE IRA an employee may contribute up to $11,500 per year, plus age 50 and over catch-up contributions. See the expanded discussion of the SIMPLE IRA on page 541.

Likewise, in contrast to the traditional IRA, the Roth IRA permits an individual to make nondeductible contributions to a tax-deferred account up to the same dollar limits. Provided certain requirements are met, distributions from the Roth IRA are not subject to income taxes. See the expanded discussion of the Roth IRA on page 524.

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Title Annotation:Terms & Concepts
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
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