The difference between a traditional IRA and a contributing IRA

Individual retirement accounts are categorized in a variety of ways for tax purposes. Understand that the IRA is a tax-protected structure. It can keep funds that have been contributed to other retirement plans or it can accept contributions. As a structure, it has many investments that you can buy in your account. Roth designations and tradition define tax structures while contributing and converting determine how money enters the account.

The difference between a traditional IRA and a contributing IRA
The difference between a traditional IRA and a contributing IRA

Traditional or Roth
There are two basic tax structures for IRA accounts. A traditional IRA structure deducts contributions from annual income and increases deferred taxes until it is distributed. After distribution, the amount withdrawn is added to the annual income and is taxed under the existing tax bracket of the IRA owner. Roth IRAs do not deduct contributions from the owner’s annual income. Money is not tax-deferred but as long as the account holder has a Roth IRA for at least five years and is at least 59 and a half years old, the money will be tax-exempt. Both structures are subject to a 10 percent tax penalty on distribution before the age of 59 1/2.

IRA contributions
Both IRA structures can be IRA contributions. Basically, every IRA or retirement plan has to start with contributions. A contribution is an amount you put into an account based on your annual allocation. The 2011 maximum contribution to a Roth or traditional IRA was $5,000 for those under 50; those who exceed the threshold can contribute $6,000. If you can make an annual contribution to your IRA, it’s the IRA that contributes regardless of whether it’s a traditional IRA or a Roth.

IRA moves
When a person with a 401k, 403b, IRA, or other similar contribution retirement plan account has accumulated money over years of contributions, then switching can become an option. The transfer will transfer money from one retirement plan to another, usually from the employer’s plan to the IRA after the job is over. The IRS defines simple conversion IRAs for tax recording. When the conversion occurs, 1099-R indicates the amount transferred out of the IRA, and Form 5498 indicates the amount that went into the new transitional IRA in the form of checks and balances for which no distribution was made. Convertible IRAs usually do not come with contributions.

Combined assets
The difference between a contribution IRA and a transitional IRA is usually maintained at a custody level. The IRS maintains accounting through Form 1099-R and Form 5498 for all money transfers and uses your Line 32 deduction on Form 1040 to account for all tax-deductible contributions. Your IRA supervisor allows or rejects the transfer of assets depending on their own administrative ability to maintain proper accounting. While it may be convenient to transfer an old employer’s plan to a joint account, you will lose the ability to transfer assets to a new employer’s plan if you share the asset. For those who may want to keep this option, keeping the contributed assets and transferable assets separate is the right thing to do.

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