Traditional IRAs
A traditional IRA allows your contributions to grow tax-deferred. In other words, you don't pay any income taxes on your account's growth until you withdraw your money, giving you accelerated earning power.
How They Work
You may contribute up to $5,000 per year to a traditional IRA as long as you have earned income. Beginning at age 50, you may contribute an additional $1,000 per year. However, the amount you are allowed to deduct from your taxable income is subject to limitations determined by your Modified Adjusted Gross Income (MAGI), tax filing status, and whether or not you and/or your spouse participate in an employer-sponsored retirement plan. Although distributions will be taxed upon withdrawal, all or a portion of your contributions may be tax deductible and traditional IRAs offer tax-deferred growth potential.How They Can Be Used
There is no requirement that your traditional IRA assets be used for education expenses. However, the 10% early distribution penalty on contributions and earnings is waived1 if the money is used to cover qualified education expenses for yourself, a spouse, your child, or your grandchild. These include tuition, fees, books, supplies, and equipment required for enrollment at an accredited college or university, as well as room and board if the student attends half-time or more. They do not include repayment of student loans.Benefits
- Tax Savings – Depending on your income and whether or not you participate in an employer plan, your contributions may be tax deductible. And your contributions grow tax-deferred until you withdraw the funds.
- Flexibility – You control your funds and, based on your personal savings goals, you can invest your assets in a variety of products including mutual funds, annuities, CDs and more. And unlike 529 plans and Coverdell Education Savings Accounts, you are not penalized if you don't use the entire amount for college, allowing you to use the money for both college and retirement.
- Consolidation – You have the option of rolling over assets from your qualified retirement plan, such as a 401(k), or other IRAs to a traditional IRA.
Considerations
- Taxation – While the 10% early distribution penalty does not apply to withdrawals that are used for qualified education expenses, you will be required to pay taxes on them.
- Financial aid eligibility – Although the money in a traditional IRA is not counted as an asset when calculating financial aid, withdrawals do count as parental income, potentially reducing financial aid eligibility.
- Effect on retirement – Unplanned withdrawals may reduce retirement funds; parents should use an IRA for college only if retirement is covered by other sources.
Contact a Thrivent Financial representative to see if a traditional IRA is right for you.
1 The 10% early distribution penalty may also be waived for other qualified expenses, in addition to education expenses. Visit www.irs.gov for more information.
201102178