The Traditional IRA

A traditional IRA is not itself an investment, but a tax-advantaged vehicle in which you can hold some of your investments. You need to decide how to invest your IRA dollars based on your own tolerance for risk and investment philosophy. How fast your IRA dollars grow is largely a function of the investments you choose to fund the IRA.

Deductible contributions
When you make tax-deductible contributions to a traditional IRA, the money you invest in the IRA is pretax. Tax-deductible contributions are pretax because they reduce your taxable income on your federal income tax return. You can contribute up to the lesser of $5,000 or 100 percent of your taxable compensation to a traditional IRA in 2008 ($4,000 in 2007). If neither you nor your spouse is covered by an employer-sponsored retirement plan your entire contribution can be tax deductible. If one of you is covered by such a plan, the amount of deductible contribution you can make (if any) depends on your modified adjusted gross income (MAGI) and federal income tax filing status for the year.

Nondeductible contributions
If you or your spouse is covered by an employer-sponsored retirement plan, you might not be able to deduct all (or any) of your traditional IRA contribution. But you can still contribute up to the annual contribution limit (or your taxable compensation for the year, if less), even if part or all of your contribution is not deductible (and therefore not pretax). Contributions that you make to a traditional IRA that you cannot deduct on your federal income tax return are referred to as nondeductible contributions.

"Catch-up" contributions are allowed if you're at least 50
Individuals age 50 and older may make an additional yearly catch-up contribution of up to $1,000 to a traditional or Roth IRA (over and above the regular contribution limit). The purpose of this provision is to help older individuals increase their savings as they approach retirement.