You must have earned income to contribute to a traditional IRA or to a Roth IRA; and even if you have earned income, you can't contribute to a traditional IRA after age 70 1/2.
Traditional tax-deductible IRAs:
• Contributions reduce your taxable income.
• You're taxed only on withdrawals.
• Your investment choices are almost unlimited. You can put virtually any bank, brokerage, mutual fund or insurance product into an IRA.
• Your withdrawals are taxed as ordinary income and subject to a 10 percent early withdrawal penalty until you're 59 1/2.
• You must start taking minimum annual withdrawals after age 70 1/2.
What to consider: Are you eligible for a deductible IRA? The answer is yes if you and your spouse didn't participate in a workplace retirement plan during the year. Otherwise, your eligibility for a deduction depends on your income, tax filing status, and whether either of you is covered by a workplace retirement plan. [Check the IRS website for more details].
Traditional nondeductible IRAs:
• Your earnings are untaxed until you withdraw them.
• Your investment selection is almost unlimited.
• Your contributions don't reduce your current taxable income.
• Your earnings are taxed as ordinary income when withdrawn and subject to a 10 percent early withdrawal penalty until age 59 1/2.
• Each withdrawal includes some taxable earnings along with tax-free return of contribution.
• You must start taking minimum annual withdrawals after you turn 70 1/2.
What to consider: A nondeductible IRA makes sense only if you're ineligible for a traditional deductible IRA (see eligibility rules above) and your earnings disqualify you for a Roth IRA.
Contribution limits: The maximum amount you can put into a traditional tax-deductible IRA, a traditional nondeductible IRA or a Roth IRA is the same: In 2013, it's $5,500, or $6,500 if you were at least age 50 at year's end. You can also divide this maximum contribution between a traditional IRA (deductible or nondeductible) and a Roth IRA if you wish.