Tax Deduction

• When you make a contribution to a traditional IRA, you are entitled to a tax deduction for the amount you put in. That tax deduction can make it easier to save, since the deductibility can boost the size of your refund, or at least reduce the amount you owe. You can run the numbers ahead of time to see the impact of your yearly IRA contribution on your taxable income and your tax liability.
  
  

Taxes in Retirement

• When you retire and begin taking money out of your traditional IRA, you must pay taxes on those withdrawals at your ordinary income tax rate. Each year you take a distribution from your IRA you will receive a 1099-R form listing how much you withdrew. You must include this income when you complete your tax return and pay taxes on the proceeds. Retirees living off their assets should do some preliminary tax planning during the year and start saving money to pay the taxes they owe.
  
  

Contribution Limits

• The contribution limits for traditional IRA accounts are listed on the IRS website, and it is important to check those limits before you make your yearly deposit. For 2011, you can contribute up to $5,000 to a traditional IRA, plus an extra $1,000 if you are 50 years of age or older. The entire amount of your contribution must be covered by earned income; you cannot contribute unearned income like interest or dividends to an IRA account.
  
  

Required Minimum Distribution

• When you have a traditional IRA, you can begin to take money out without penalty when you reach the age of 59 1/2. You can withdraw as much or as little as you want during those years, using the funds to meet your cash flow needs and meet your expenses. But when you reach age 70 1/2, you are required to withdraw a minimum amount each year. This is known as the required minimum distribution, or RMD, and it is based on the balance in the account, your age and your life expectancy. It is very important to calculate this distribution correctly, since the IRS can assess a penalty equal to 50 percent of what you should have taken if you fail to take the RMD.