17. Individual Retirement Arrangements (IRAs)
Table of Contents
* What's New for 2005
* What's New for 2006
* Reminders
* Introduction
* Useful Items - You may want to see:
* Traditional IRAs
o What Is a Traditional IRA?
o Who Can Set Up a Traditional IRA?
o When and How Can a Traditional IRA Be Set Up?
o How Much Can Be Contributed?
o When Can Contributions Be Made?
o How Much Can You Deduct?
o Nondeductible Contributions
o Inherited IRAs
o Can You Move Retirement Plan Assets?
o When Can You Withdraw or Use IRA Assets?
o When Must You Withdraw IRA Assets? (Required Minimum Distributions)
o Are Distributions Taxable?
o What Acts Result in Penalties or Additional Taxes?
* Roth IRAs
o What Is a Roth IRA?
o When Can a Roth IRA Be Set Up?
o Can You Contribute to a Roth IRA?
o Can You Move Amounts Into a Roth IRA?
o Are Distributions Taxable?
What's New for 2005
Katrina Emergency Tax Relief Act of 2005. This Act provides tax relief for
persons affected by Hurricane Katrina. Under the Act, if you have funds in
certain retirement plans, including IRAs, you may qualify for tax-favored
withdrawals and recontributions. See Publication 4492.
Traditional IRA contribution and deduction limit. The contribution limit to
your traditional IRA for 2005 increased to the smaller of the following
amounts:
*
$4,000, or
*
Your taxable compensation for the year.
If you reached age 50 before 2006, the most that could be contributed to
your traditional IRA for 2005 is the smaller of the following amounts:
*
$4,500, or
*
Your taxable compensation for the year.
Roth IRA contribution limit. If contributions were made on your behalf only
to Roth IRAs, your contribution limit for 2005 is generally the lesser of:
*
$4,000, or
*
Your taxable compensation for the year.
If you were 50 or older in 2005 and contributions on your behalf were made
only to Roth IRAs, your contribution limit for 2005 is generally the lesser of:
*
$4,500, or
*
Your taxable compensation for the year.
However, if your modified adjusted gross income (AGI) is above a certain
amount, your contribution limit may be reduced.
Modified AGI limit for traditional IRA contributions increased. For 2005,
if you were covered by a retirement plan at work, your deduction for
contributions to a traditional IRA is reduced (phased out) if your modified
adjusted gross income (AGI) is:
*
More than $70,000 but less than $80,000 for a married couple filing a
joint return or a qualifying widow(er),
*
More than $50,000 but less than $60,000 for a single individual or
head of household, or
*
Less than $10,000 for a married individual filing a separate return.
For all filing statuses other than married filing separately, the upper and
lower limits of the phaseout range increased by $5,000.
Modified AGI. Beginning in 2005, the domestic production activities
deduction is added back to income when figuring modified AGI.
Modified AGI for conversion purposes. Beginning in 2005, modified AGI for
conversion purposes does not include required distributions from IRAs. See
Modified AGI under Roth IRAs.
What's New for 2006
Traditional IRA contribution and deduction limit. The contribution limit to
your traditional IRA for 2006 will be the smaller of the following amounts:
*
$4,000, or
*
Your taxable compensation for the year.
If you will be age 50 before 2007, the most that can be contributed to your
traditional IRA for 2006 will be the smaller of the following amounts:
*
$5,000, or
*
Your taxable compensation for the year.
For more information, see How Much Can Be Contributed.
Roth IRA contribution limit. If contributions are made on your behalf only
to Roth IRAs, your contribution limit for 2006 will generally be the lesser of:
*
$4,000, or
*
Your taxable compensation for the year.
If you will be age 50 before 2007 and contributions on your behalf are made
only to Roth IRAs, your contribution limit for 2006 will generally be the
lesser of:
*
$5,000, or
*
Your taxable compensation for the year.
However, if your modified AGI is above a certain amount, your contribution
limit may be reduced. For more information, see How Much Can Be
Contributed? under Can You Contribute to a Roth IRA.
Modified AGI limit for traditional IRA contributions increased for a
married couple filing a joint return. For 2006, if you are covered by a
retirement plan at work, your deduction for contributions to a traditional
IRA will be reduced (phased out) if your modified adjusted gross income
(AGI) is:
*
More than $75,000 but less than $85,000 for a married couple filing a
joint return or a qualifying widow(er),
*
More than $50,000 but less than $60,000 for a single individual or
head of household, or
*
Less than $10,000 for a married individual filing a separate return.
See How Much Can You Deduct.
Reminders
Statement of required minimum distribution. If a minimum distribution is
required from your IRA, the trustee, custodian, or issuer that held the IRA
at the end of the preceding year must either report the amount of the
required minimum distribution to you, or offer to calculate it for you. The
report or offer must include the date by which the amount must be
distributed. The report is due January 31 of the year in which the minimum
distribution is required. It can be provided with the year-end fair market
value statement that you normally get each year. No report is required for
IRAs of owners who have died.
IRA interest. Although interest earned from your IRA is generally not taxed
in the year earned, it is not tax-exempt interest. Do not report this
interest on your tax return as tax-exempt interest.
Form 8606. If you make nondeductible contributions to a traditional IRA
and you do not file Form 8606, Nondeductible IRAs, with your tax return,
you may have to pay a $50 penalty.
Roth IRA. You cannot claim a deduction for any contributions to a Roth IRA.
But, if you satisfy the requirements, all earnings are tax free and neither
your nondeductible contributions nor any earnings on them are taxable when
you withdraw them. See Roth IRAs, later.
tip
The term “50 or older” is used several times in this chapter. It refers to
an IRA owner who is age 50 or older by the end of the tax year.
Introduction
An individual retirement arrangement (IRA) is a personal savings plan that
gives you tax advantages for setting aside money for your retirement.
This chapter discusses:
*
The rules for a traditional IRA (any IRA that is not a Roth or SIMPLE
IRA), and
*
The Roth IRA, which features nondeductible contributions and tax-free
distributions.
Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for
Employees (SIMPLEs) are not discussed in this chapter. For more information
on these plans and employees' SEP-IRAs and SIMPLE IRAs that are part of
these plans, see Publications 560 and 590.
Useful Items - You may want to see:
Publication
*
560 Retirement Plans for Small Business
*
590 Individual Retirement Arrangements (IRAs)
Form (and Instructions)
*
5329
Additional Taxes on Qualified Plans (including IRAs) and Other
Tax-Favored Accounts
*
8606
Nondeductible IRAs
Traditional IRAs
In this chapter the original IRA (sometimes called an ordinary or regular
IRA) is referred to as a “traditional IRA.” Two advantages of a traditional
IRA are:
*
You may be able to deduct some or all of your contributions to it,
depending on your circumstances, and,
*
Generally, amounts in your IRA, including earnings and gains, are not
taxed until they are distributed.
What Is a Traditional IRA?
A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.
Who Can Set Up a Traditional IRA?
You can set up and make contributions to a traditional IRA if:
*
You (or, if you file a joint return, your spouse) received taxable
compensation during the year, and
*
You were not age 70˝ by the end of the year.
What is compensation? Generally, compensation is what you earn from
working. Compensation includes wages, salaries, tips, professional fees,
bonuses, and other amounts you receive for providing personal services. The
IRS treats as compensation any amount properly shown in box 1 (Wages, tips,
other compensation) of Form W-2, Wage and Tax Statement, provided that
amount is reduced by any amount properly shown in box 11 (Nonqualified plans).
Scholarship and fellowship payments are compensation for this purpose
only if shown in box 1 of Form W-2.
Compensation also includes commissions and taxable alimony and separate
maintenance payments.
Self-employment income. If you are self-employed (a sole proprietor or a
partner), compensation is the net earnings from your trade or business
(provided your personal services are a material income-producing factor)
reduced by the total of:
*
The deduction for contributions made on your behalf to retirement
plans, and
*
The deduction allowed for one-half of your self-employment taxes.
Compensation includes earnings from self-employment even if they are not
subject to self-employment tax because of your religious beliefs.
What is not compensation? Compensation does not include any of the
following items.
*
Earnings and profits from property, such as rental income, interest
income, and dividend income.
*
Pension or annuity income.
*
Deferred compensation received (compensation payments postponed from
a past year).
*
Income from a partnership for which you do not provide services that
are a material income-producing factor.
*
Any amounts you exclude from income, such as foreign earned income
and housing costs.
When and How Can a Traditional IRA Be Set Up?
You can set up a traditional IRA at any time. However, the time for making
contributions for any year is limited. See When Can Contributions Be Made,
later.
You can set up different kinds of IRAs with a variety of organizations. You
can set up an IRA at a bank or other financial institution or with a mutual
fund or life insurance company. You can also set up an IRA through your
stockbroker. Any IRA must meet Internal Revenue Code requirements.
Kinds of traditional IRAs. Your traditional IRA can be an individual
retirement account or annuity. It can be part of either a simplified
employee pension (SEP) or an employer or employee association trust account.
How Much Can Be Contributed?
There are limits and other rules that affect the amount that can be
contributed to a traditional IRA. These limits and other rules are
explained below.
Community property laws. Except as discussed later under Spousal IRA
limit, each spouse figures his or her limit separately, using his or her
own compensation. This is the rule even in states with community property laws.
Brokers' commissions. Brokers' commissions paid in connection with your
traditional IRA are subject to the contribution limit.
Trustees' fees. Trustees' administrative fees are not subject to the
contribution limit.
Caution
Contributions on your behalf to your traditional IRAs reduce your limit for
contributions to Roth IRAs. (See Roth IRAs, later.)
General limit. The most that can be contributed to your traditional IRA
is the smaller of the following amounts.
*
$4,000 ($4,500 if you are 50 or older in 2005). For 2006, the amount
is $4,000 (but increases to $5,000 if you are 50 or older).
*
Your taxable compensation (defined earlier) for the year.
This is the most that can be contributed regardless of whether the
contributions are to one or more traditional IRAs or whether all or part of
the contributions are nondeductible. (See Nondeductible Contributions, later.)
Example 1.
Betty, who is 34 years old and single, earned $24,000 in 2005. Her IRA
contributions for 2005 are limited to $4,000.
Example 2.
John, an unmarried college student working part time, earned $3,500 in
2005. His IRA contributions for 2005 are limited to $3,500, the amount of
his compensation.
Spousal IRA limit. If you file a joint return and your taxable
compensation is less than that of your spouse, the most that can be
contributed for the year to your IRA is the smaller of the following amounts.
1.
$4,000 ($4,500 if you are 50 or older in 2005). For 2006, the amount
is $4,000 (but increases to $5,000 if you are 50 or older in 2006).
2.
The total compensation includible in the gross income of both you and
your spouse for the year, reduced by the following two amounts.
1.
Your spouse's IRA contribution for the year to a traditional IRA.
2.
Any contribution for the year to a Roth IRA on behalf of your
spouse.
This means that the total combined contributions that can be made for the
year to your IRA and your spouse's IRA can be as much as $8,000 ($8,500 if
only one of you is 50 or older, or $9,000 if both of you are 50 or older).
For 2006, combined total contributions can be as much as $8,000 ($9,000 if
only one of you is 50 or older or $10,000 if both of you are 50 or older.
When Can Contributions Be Made?
As soon as you set up your traditional IRA, contributions can be made to it
through your chosen sponsor (trustee or other administrator). Contributions
must be in the form of money (cash, check, or money order). Property cannot
be contributed.
Contributions must be made by due date. Contributions can be made to your
traditional IRA for a year at any time during the year or by the due date
for filing your return for that year, not including extensions. For most
people, this means that contributions for 2005 must be made by April 17,
2006, and contributions for 2006 must be made by April 16, 2007.
Age 70˝ rule. Contributions cannot be made to your traditional IRA for
the year in which you reach age 70˝ or for any later year.
You attain age 70˝ on the date that is six calendar months after the 70th
anniversary of your birth. If you were born on June 30, 1935, the 70th
anniversary of your birth is June 30, 2005, and you attained age 70˝ on
December 30, 2005. If you were born on July 1, 1935, the 70th anniversary
of your birth was July 1, 2005, and you attained age 70˝ on January 1, 2006.
Designating year for which contribution is made. If an amount is
contributed to your traditional IRA between January 1 and April 15, you
should tell the sponsor which year (the current year or the previous year)
the contribution is for. If you do not tell the sponsor which year it is
for, the sponsor can assume, and report to the IRS, that the contribution
is for the current year (the year the sponsor received it).
Filing before a contribution is made. You can file your return claiming a
traditional IRA contribution before the contribution is actually made.
However, the contribution must be made by the due date of your return, not
including extensions.
Contributions not required. You do not have to contribute to your
traditional IRA for every tax year, even if you can.
How Much Can You Deduct?
Generally, you can deduct the lesser of:
*
The contributions to your traditional IRA for the year, or
*
The general limit (or the spousal IRA limit, if it applies).
However, if you or your spouse was covered by an employer retirement plan,
you may not be able to deduct this amount. See Limit If Covered by Employer
Plan, later.
Tip
You may be eligible to claim a credit for contributions to your traditional
IRA. For more information see chapter 37.
Trustees' fees. Trustees' administrative fees that are billed separately
and paid in connection with your traditional IRA are not deductible as IRA
contributions. However, they may be deductible as a miscellaneous itemized
deduction on Schedule A (Form 1040). See chapter 28.
Brokers' commissions. Brokers' commissions are part of your IRA
contribution and, as such, are deductible subject to the limits.
Full deduction. If neither you nor your spouse was covered for any part
of the year by an employer retirement plan, you can take a deduction for
total contributions to one or more traditional IRAs of up to the lesser of
the following amounts.
*
$4,000 ($4,500 if you are 50 or older in 2005). For 2006, the amount
is $4,000 (but increases to $5,000 if you are 50 or older in 2006).
*
100% of your compensation.
This limit is reduced by any contributions made to a 501(c)(18) plan on
your behalf.
Spousal IRA. In the case of a married couple with unequal compensation
who file a joint return, the deduction for contributions to the traditional
IRA of the spouse with less compensation is limited to the lesser of the
following amounts.
1.
$4,000 ($4,500 if you are 50 or older in 2005). For 2006, the amount
is $4,000 (but increases to $5,000 if that spouse is 50 or older in 2006).
2.
The total compensation includible in the gross income of both spouses
for the year reduced by the following three amounts.
1.
The IRA deduction for the year of the spouse with the greater
compensation.
2.
Any designated nondeductible contribution for the year made on
behalf of the spouse with the greater compensation.
3.
Any contributions for the year to a Roth IRA on behalf of the
spouse with the greater compensation.
This limit is reduced by any contributions to a 501(c)(18) plan on behalf
of the spouse with the lesser compensation.
Note.
If you were divorced or legally separated (and did not remarry) before the
end of the year, you cannot deduct any contributions to your spouse's IRA.
After a divorce or legal separation, you can deduct only contributions to
your own IRA. Your deductions are subject to the rules for single individuals.
Covered by an employer retirement plan. If you or your spouse was covered
by an employer retirement plan at any time during the year for which
contributions were made, your deduction may be further limited. This is
discussed later under Limit If Covered by Employer Plan. Limits on the
amount you can deduct do not affect the amount that can be contributed. See
Nondeductible Contributions, later.
Are You Covered by an Employer Plan?
The Form W-2 you receive from your employer has a box used to indicate
whether you were covered for the year. The “Retirement plan” box should be
checked if you were covered.
Reservists and volunteer firefighters should also see Situations in Which
You Are Not Covered, later.
If you are not certain whether you were covered by your employer's
retirement plan, you should ask your employer.
Federal judges. For purposes of the IRA deduction, federal judges are
covered by an employer retirement plan.
For Which Year(s) Are You Covered?
Special rules apply to determine the tax years for which you are covered by
an employer plan. These rules differ depending on whether the plan is a
defined contribution plan or a defined benefit plan.
Tax year. Your tax year is the annual accounting period you use to keep
records and report income and expenses on your income tax return. For
almost all people, the tax year is the calendar year.
Defined contribution plan. Generally, you are covered by a defined
contribution plan for a tax year if amounts are contributed or allocated to
your account for the plan year that ends with or within that tax year.
A defined contribution plan is a plan that provides for a separate
account for each person covered by the plan. Types of defined contribution
plans include profit-sharing plans, stock bonus plans, and money purchase
pension plans.
Defined benefit plan. If you are eligible to participate in your
employer's defined benefit plan for the plan year that ends within your tax
year, you are covered by the plan. This rule applies even if you:
*
Declined to participate in the plan,
*
Did not make a required contribution, or
*
Did not perform the minimum service required to accrue a benefit for
the year.
A defined benefit plan is any plan that is not a defined contribution
plan. Defined benefit plans include pension plans and annuity plans.
No vested interest. If you accrue a benefit for a plan year, you are
covered by that plan even if you have no vested interest in (legal right
to) the accrual.
Situations in Which You Are Not Covered
Unless you are covered under another employer plan, you are not covered by
an employer plan if you are in one of the situations described below.
Social security or railroad retirement. Coverage under social security or
railroad retirement is not coverage under an employer retirement plan.
Benefits from a previous employer's plan. If you receive retirement
benefits from a previous employer's plan, you are not covered by that plan.
Reservists. If the only reason you participate in a plan is because you
are a member of a reserve unit of the armed forces, you may not be covered
by the plan. You are not covered by the plan if both of the following
conditions are met.
1.
The plan you participate in is established for its employees by:
1.
The United States,
2.
A state or political subdivision of a state, or
3.
An instrumentality of either (a) or (b) above.
2.
You did not serve more than 90 days on active duty during the year
(not counting duty for training).
Volunteer firefighters. If the only reason you participate in a plan is
because you are a volunteer firefighter, you may not be covered by the
plan. You are not covered by the plan if both of the following conditions
are met.
1.
The plan you participate in is established for its employees by:
1.
The United States,
2.
A state or political subdivision of a state, or
3.
An instrumentality of either (a) or (b) above.
2.
Your accrued retirement benefits at the beginning of the year will
not provide more than $1,800 per year at retirement.
Limit If Covered by Employer Plan
If either you or your spouse was covered by an employer retirement plan,
you may be entitled to only a partial (reduced) deduction or no deduction
at all, depending on your income and your filing status.
Your deduction begins to decrease (phase out) when your income rises above
a certain amount and is eliminated altogether when it reaches a higher
amount. These amounts vary depending on your filing status.
To determine if your deduction is subject to phaseout, you must determine
your modified adjusted gross income (AGI) and your filing status. See
Filing status and Modified adjusted gross income (AGI), later. Then use
Table 17-1 or 17-2 to determine if the phaseout applies.
Social security recipients. Instead of using Table 17-1 or 17-2, use the
worksheets in Appendix B of Publication 590 if, for the year, all of the
following apply.
*
You received social security benefits.
*
You received taxable compensation.
*
Contributions were made to your traditional IRA.
*
You or your spouse was covered by an employer retirement plan.
Use those worksheets to figure your IRA deduction, your nondeductible
contribution, and the taxable portion, if any, of your social security
benefits.
Deduction phaseout. If you were covered by an employer retirement plan
and you did not receive any social security retirement benefits, your IRA
deduction may be reduced or eliminated depending on your filing status and
modified AGI as shown in Table 17-1.
Table 17-1. Effect of Modified AGI 1 on Deduction if You Are Covered by
Retirement Plan at Work
If you are covered by a retirement plan at work, use this table to
determine if your modified AGI affects the amount of your deduction.
IF your filing status is... AND your modified AGI is... THEN you
can take...
single
or
head of household $50,000 or less a full deduction.
more than $50,000
but less than $60,000 a partial deduction.
$60,000 or more no deduction.
married filing jointly
or
qualifying widow(er) $70,000 or less a full deduction.
more than $70,000
but less than $80,000 a partial deduction.
$80,000 or more no deduction.
married filing separately 2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
1Modified AGI (adjusted gross income). See Modified adjusted gross income
(AGI).
2If you did not live with your spouse at any time during the year, your
filing status is considered Single for this purpose (therefore, your IRA
deduction is determined under the “Single” column).
Tip
For 2006, if you are covered by a retirement plan at work, your IRA
deduction will not be reduced (phased out) unless your modified AGI is:
*
More than $50,000 but less than $60,000 for a single individual (or
head of household),
*
More than $75,000 but less than $85,000 for a married couple filing a
joint return (or a qualifying widow(er)), or
*
Less than $10,000 for a married individual filing a separate return.
If your spouse is covered. If you are not covered by an employer
retirement plan, but your spouse is, and you did not receive any social
security benefits, your IRA deduction may be reduced or eliminated entirely
depending on your filing status and modified AGI as shown in Table 17-2.
Table 17-2. Effect of Modified AGI 1 on Deduction if You Are NOT Covered by
Retirement Plan at Work
If you are not covered by a retirement plan at work, use this table to
determine
if your modified AGI affects the amount of your deduction.
IF your filing status is... AND your modified AGI is... THEN you
can take...
single,
head of household, or
qualifying widow(er) any amount a full deduction.
married filing jointly or separately with a spouse who is not covered by a
plan at work any amount a full deduction.
married filing jointly with a spouse who is covered by a plan at work
$150,000 or less a full deduction.
more than $150,000
but less than $160,000 a partial deduction.
$160,000 or more no deduction.
married filing separately with a spouse who is covered by a plan at
work 2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
1Modified AGI (adjusted gross income). See Modified adjusted gross income
(AGI).
2You are entitled to the full deduction if you did not live with your
spouse at any time during the year.
Filing status. Your filing status depends primarily on your marital
status. For this purpose, you need to know if your filing status is single
or head of household, married filing jointly or qualifying widow(er), or
married filing separately. If you need more information on filing status,
see chapter 2.
Lived apart from spouse. If you did not live with your spouse at any time
during the year and you file a separate return, your filing status, for
this purpose, is single.
Modified adjusted gross income (AGI). How you figure your modified AGI
depends on whether you are filing Form 1040 or Form 1040A. If you made
contributions to your IRA for 2005 and received a distribution from your
IRA in 2005, see Publication 590.
Caution
Do not assume that your modified AGI is the same as your compensation. Your
modified AGI may include income in addition to your compensation (discussed
earlier), such as interest, dividends, and income from IRA distributions.
Form 1040. If you file Form 1040, refigure the amount on the page 1
“adjusted gross income” line without taking into account any of the
following amounts.
*
IRA deduction.
*
Student loan interest deduction.
*
Tuition and fees deduction.
*
Domestic production activities deduction.
*
Foreign earned income exclusion.
*
Foreign housing exclusion or deduction.
*
Exclusion of qualified savings bond interest shown on Form 8815,
Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After
1989 (For Filers With Qualified Higher Education Expenses).
*
Exclusion of employer-provided adoption benefits shown on Form 8839,
Qualified Adoption Expenses.
This is your modified AGI.
Form 1040A. If you file Form 1040A, refigure the amount on the page 1
“adjusted gross income” line without taking into account any of the
following amounts.
*
IRA deduction.
*
Student loan interest deduction.
*
Tuition and fees deduction.
*
Exclusion of qualified savings bond interest shown on Form 8815.
*
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
Both contributions for 2005 and distributions in 2005. If all three of
the following apply, any IRA distributions you received in 2005 may be
partly tax free and partly taxable.
*
You received distributions in 2005 from one or more traditional IRAs.
*
You made contributions to a traditional IRA for 2005.
*
Some of those contributions may be nondeductible contributions.
If this is your situation, you must figure the taxable part of the
traditional IRA distribution before you can figure your modified AGI. To do
this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA
Distribution, in Publication 590.
If at least one of the above does not apply, figure your modified AGI
using Worksheet 17-1 in this chapter.
How to figure your reduced IRA deduction. You can figure your reduced IRA
deduction for either Form 1040 or Form 1040A by using the worksheets in
chapter 1 of Publication 590. Also, the instructions for Form 1040 and Form
1040A include similar worksheets that you may be able to use instead.
Reporting Deductible Contributions
If you file Form 1040, enter your IRA deduction on line 32 of that form. If
you file Form 1040A, enter your IRA deduction on line 17. You cannot deduct
IRA contributions on Form 1040EZ.
Worksheet 17-1. Figuring Your Modified AGI
Use this worksheet to figure your modified adjusted gross income for
traditional IRA purposes.
1. Enter your adjusted gross income (AGI) shown on line 22, Form 1040A, or
line 38, Form 1040 figured without taking into account
line 17, Form 1040A, or line 32, Form 1040 1.
2. Enter any Student loan interest deduction from line 18, Form
1040A, or line 33, Form 1040 2.
3. Enter any Tuition and fees deduction from line 19, Form 1040A,
or line 34, Form 1040 3.
4. Enter any domestic production activity deduction from line 35, Form
1040 4.
5. Enter any Foreign earned income and/or housing exclusion from
line 18, Form 2555-EZ, or line 43, Form 2555 5.
6. Enter any Foreign housing deduction from line 48, Form 2555 6.
7. Enter any Excluded qualified savings bond interest shown on
line 3, Schedule 1, Form 1040A, or line 3, Schedule B,
Form 1040 (from line 14, Form 8815) 7.
8. Enter any Exclusion of employer-provided adoption benefits shown
on line 30, Form 8839 8.
9. Add lines 1 through 8. This is your Modified AGI for traditional
IRA purposes 9.
Nondeductible Contributions
Although your deduction for IRA contributions may be reduced or eliminated,
contributions can be made to your IRA up to the general limit or, if it
applies, the spousal IRA limit. The difference between your total permitted
contributions and your IRA deduction, if any, is your nondeductible
contribution.
Example.
Mike is 28 years old and single. In 2005, he was covered by a retirement
plan at work. His salary was $57,312. His modified AGI was $65,000. Mike
made a $4,000 IRA contribution for 2005. Because he was covered by a
retirement plan and his modified AGI was over $60,000, he cannot deduct his
$4,000 IRA contribution. He must designate this contribution as a
nondeductible contribution by reporting it on Form 8606, as explained next.
Form 8606. To designate contributions as nondeductible, you must file
Form 8606.
You do not have to designate a contribution as nondeductible until you
file your tax return. When you file, you can even designate otherwise
deductible contributions as nondeductible.
You must file Form 8606 to report nondeductible contributions even if you
do not have to file a tax return for the year.
Failure to report nondeductible contributions. If you do not report
nondeductible contributions, all of the contributions to your traditional
IRA will be treated as deductible. All distributions from your IRA will be
taxed unless you can show, with satisfactory evidence, that nondeductible
contributions were made.
Penalty for overstatement. If you overstate the amount of nondeductible
contributions on your Form 8606 for any tax year, you must pay a penalty of
$100 for each overstatement, unless it was due to reasonable cause.
Penalty for failure to file Form 8606. You will have to pay a $50 penalty
if you do not file a required Form 8606, unless you can prove that the
failure was due to reasonable cause.
Tax on earnings on nondeductible contributions. As long as contributions
are within the contribution limits, none of the earnings or gains on
contributions (deductible or nondeductible) will be taxed until they are
distributed. See When Can You Withdraw or Use IRA Assets, later.
Cost basis. You will have a cost basis in your traditional IRA if you
made any nondeductible contributions. Your cost basis is the sum of the
nondeductible contributions to your IRA minus any withdrawals or
distributions of nondeductible contributions.
Inherited IRAs
If you inherit a traditional IRA, you are called a beneficiary. A
beneficiary can be any person or entity the owner chooses to receive the
benefits of the IRA after he or she dies. Beneficiaries of a traditional
IRA must include in their gross income any taxable distributions they receive.
Inherited from spouse. If you inherit a traditional IRA from your spouse,
you generally have the following three choices.
1.
Treat it as your own IRA by designating yourself as the account owner.
2.
Treat it as your own by rolling it over into your traditional IRA, or
to the extent it is taxable, into a:
1.
Qualified employer plan,
2.
Qualified employee annuity plan (section 403(a) plan),
3.
Tax-sheltered annuity plan (section 403(b) plan), or
4.
Deferred compensation plan of a state or local government
(section 457 plan).
3.
Treat yourself as the beneficiary rather than treating the IRA as
your own.
Treating it as your own. You will be considered to have chosen to treat
the IRA as your own if:
*
Contributions (including rollover contributions) are made to the
inherited IRA, or
*
You do not take the required minimum distribution for a year as a
beneficiary of the IRA.
You will only be considered to have chosen to treat the IRA as your own if:
*
You are the sole beneficiary of the IRA, and
*
You have an unlimited right to withdraw amounts from it.
However, if you receive a distribution from your deceased spouse's IRA, you
can roll that distribution over into your own IRA within the 60-day time
limit, as long as the distribution is not a required distribution, even if
you are not the sole beneficiary of your deceased spouse's IRA.
Inherited from someone other than spouse. If you inherit a traditional
IRA from anyone other than your deceased spouse, you cannot treat the
inherited IRA as your own. This means that you cannot make any
contributions to the IRA. It also means you cannot roll over any amounts
into or out of the inherited IRA. However, you can make a
trustee-to-trustee transfer as long as the IRA into which amounts are being
moved is set up and maintained in the name of the deceased IRA owner for
the benefit of you as beneficiary.
For more information, see the discussion of inherited IRAs under Rollover
From One IRA Into Another, later.
Can You Move Retirement Plan Assets?
You can transfer, tax free, assets (money or property) from other
retirement plans (including traditional IRAs) to a traditional IRA. You can
make the following kinds of transfers.
*
Transfers from one trustee to another.
*
Rollovers.
*
Transfers incident to a divorce.
Transfers to Roth IRAs. Under certain conditions, you can move assets
from a traditional IRA to a Roth IRA. See Can You Move Amounts Into a Roth
IRA under Roth IRAs, later.
Trustee-to-Trustee Transfer
A transfer of funds in your traditional IRA from one trustee directly to
another, either at your request or at the trustee's request, is not a
rollover. Because there is no distribution to you, the transfer is tax
free. Because it is not a rollover, it is not affected by the 1-year
waiting period required between rollovers, discussed later under Rollover
From One IRA Into Another. For information about direct transfers to IRAs
from retirement plans other than IRAs, see Publication 590.
Rollovers
Generally, a rollover is a tax-free distribution to you of cash or other
assets from one retirement plan that you contribute (roll over) to another
retirement plan. The contribution to the second retirement plan is called a
“rollover contribution.”
Note.
An amount rolled over tax free from one retirement plan to another is
generally includible in income when it is distributed from the second plan.
Kinds of rollovers to a traditional IRA. You can roll over amounts from
the following plans into a traditional IRA:
*
A traditional IRA,
*
An employer's qualified retirement plan for its employees,
*
A deferred compensation plan of a state or local government (section
457 plan), or
*
A tax-sheltered annuity plan (section 403(b) plan).
Treatment of rollovers. You cannot deduct a rollover contribution, but
you must report the rollover distribution on your tax return as discussed
later under Reporting rollovers from IRAs and under Reporting rollovers
from employer plans.
Kinds of rollovers from a traditional IRA. You may be able to roll over,
tax free, a distribution from your traditional IRA into a qualified plan.
These plans include the federal Thrift Savings Fund (for federal
employees), deferred compensation plans of state or local governments
(section 457 plans), and tax-sheltered annuity plans (section 403(b)
plans). The part of the distribution that you can roll over is the part
that would otherwise be taxable (includible in your income). Qualified
plans may, but are not required to, accept such rollovers.
Time limit for making a rollover contribution. You generally must make
the rollover contribution by the 60th day after the day you receive the
distribution from your traditional IRA or your employer's plan.
The IRS may waive the 60-day requirement where the failure to do so would
be against equity or good conscience, such as in the event of a casualty,
disaster, or other event beyond your reasonable control. For more
information, see Publication 590.
Extension of rollover period. If an amount distributed to you from a
traditional IRA or a qualified employer retirement plan is a frozen deposit
at any time during the 60-day period allowed for a rollover, special rules
extend the rollover period. For more information, see Publication 590.
More information. For more information on rollovers, see Publication 590.
Rollover From One IRA Into Another
You can withdraw, tax free, all or part of the assets from one traditional
IRA if you reinvest them within 60 days in the same or another traditional
IRA. Because this is a rollover, you cannot deduct the amount that you
reinvest in an IRA.
Waiting period between rollovers. Generally, if you make a tax-free
rollover of any part of a distribution from a traditional IRA, you cannot,
within a 1-year period, make a tax-free rollover of any later distribution
from that same IRA. You also cannot make a tax-free rollover of any amount
distributed, within the same 1-year period, from the IRA into which you
made the tax-free rollover.
The 1-year period begins on the date you receive the IRA distribution,
not on the date you roll it over into an IRA.
Example.
You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free
rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3).
You cannot, within 1 year of the distribution from IRA-1, make a tax-free
rollover of any distribution from either IRA-1 or IRA-3 into another
traditional IRA.
However, the rollover from IRA-1 into IRA-3 does not prevent you from
making a tax-free rollover from IRA-2 into any other traditional IRA. This
is because you have not, within the last year, rolled over, tax free, any
distribution from IRA-2 or made a tax-free rollover into IRA-2.
Exception. There is an exception to the rule that amounts rolled over tax
free into an IRA cannot be rolled over tax free again within the 1-year
period beginning on the date of the original distribution. The exception
applies to a distribution which meets all three of the following requirements.
1.
It is made from a failed financial institution by the Federal Deposit
Insurance Corporation (FDIC) as receiver for the institution.
2.
It was not initiated by either the custodial institution or the
depositor.
3.
It was made because:
1.
The custodial institution is insolvent, and
2.
The receiver is unable to find a buyer for the institution.
Partial rollovers. If you withdraw assets from a traditional IRA, you can
roll over part of the withdrawal tax free and keep the rest of it. The
amount you keep will generally be taxable (except for the part that is a
return of nondeductible contributions). The amount you keep may be subject
to the 10% additional tax on early distributions, discussed later under
What Acts Result in Penalties or Additional Taxes.
Required distributions. Amounts that must be distributed during a
particular year under the required distribution rules (discussed later) are
not eligible for rollover treatment.
Inherited IRAs. If you inherit a traditional IRA from your spouse, you
generally can roll it over, or you can choose to make the inherited IRA
your own. See Treating it as your own, earlier.
Not inherited from spouse. If you inherit a traditional IRA from someone
other than your spouse, you cannot roll it over or allow it to receive a
rollover contribution. You must withdraw the IRA assets within a certain
period. For more information, see Publication 590.
Reporting rollovers from IRAs. Report any rollover from one traditional
IRA to the same or another traditional IRA on lines 15a and 15b, Form 1040
or lines 11a and 11b, Form 1040A.
Enter the total amount of the distribution on Form 1040, line 15a, or
Form 1040A, line 11a. If the total amount on Form 1040, line 15a, or Form
1040A, line 11a, was rolled over, enter zero on Form 1040, line 15b, or
Form 1040A, line 11b. If the total distribution was not rolled over, enter
the taxable portion of the part that was not rolled over on Form 1040, line
15b, or Form 1040A, line 11b. Put “Rollover” next to Form 1040, line 15b,
or Form 1040A, line 11b. See the forms instructions.
If you rolled over the distribution in 2006 or from an IRA into a
qualified plan (other than an IRA), attach a statement explaining what you did.
Rollover From Employer's Plan Into an IRA
You can roll over into a traditional IRA all or part of an eligible
rollover distribution you receive from your (or your deceased spouse's):
*
Employer's qualified pension, profit-sharing or stock bonus plan,
*
Annuity plan,
*
Tax-sheltered annuity plan (section 403(b) plan), or
*
Governmental deferred compensation plan (section 457 plan).
A qualified plan is one that meets the requirements of the Internal Revenue
Code.
Eligible rollover distribution. Generally, an eligible rollover
distribution is any distribution of all or part of the balance to your
credit in a qualified retirement plan except the following.
1.
A required minimum distribution (explained later under When Must You
Withdraw IRA Assets? (Required Minimum Distributions).
2.
Hardship distributions.
3.
Any of a series of substantially equal periodic distributions paid at
least once a year over:
1.
Your lifetime or life expectancy,
2.
The lifetimes or life expectancies of you and your beneficiary, or
3.
A period of 10 years or more.
4.
Corrective distributions of excess contributions or excess deferrals,
and any income allocable to the excess, or of excess annual additions and
any allocable gains.
5.
A loan treated as a distribution because it does not satisfy certain
requirements either when made or later (such as upon default), unless the
participant's accrued benefits are reduced (offset) to repay the loan.
6.
Dividends on employer securities.
7.
The cost of life insurance coverage.
8.
Generally, a distribution to the plan participant's beneficiary.
Reporting rollovers from employer plans. Enter the total distribution
(before income tax or other deductions were withheld) on Form 1040, line
16a or Form 1040A, line 12a. This amount should be shown in box 1 of Form
1099-R. From this amount, subtract any contributions (usually shown in box
5 of Form 1099-R) that were taxable to you when made. From that result,
subtract the amount that was rolled over either directly or within 60 days
of receiving the distribution. Enter the remaining amount, even if zero, on
Form 1040, line 16b, or Form 1040A, line 12b. Also, enter "Rollover" next
to Form 1040, line 16b, or Form 1040A, line 12b.
Transfers Incident to Divorce
If an interest in a traditional IRA is transferred from your spouse or
former spouse to you by a divorce or separate maintenance decree or a
written document related to such a decree, the interest in the IRA,
starting from the date of the transfer, is treated as your IRA. The
transfer is tax free. For detailed information, see Publication 590.
Converting From Any Traditional IRA to a Roth IRA
You can convert amounts from a traditional IRA into a Roth IRA if, for the
tax year you make the withdrawal from the traditional IRA, both of the
following requirements are met.
*
Your modified AGI (explained later under Roth IRAs) is not more than
$100,000.
*
You are not a married individual filing a separate return.
Note.
If you did not live with your spouse at any time during the year and you
file a separate return, your filing status, for this purpose, is single.
Required distributions. You cannot convert amounts that must be
distributed from your traditional IRA for a particular year (including the
calendar year in which you reach age 70˝) under the required distribution
rules (discussed later).
Inherited IRAs. If you inherited a traditional IRA from someone other
than your spouse, you cannot convert it to a Roth IRA.
Income. You must include in your gross income distributions from a
traditional IRA that you would have had to include in income if you had not
converted them into a Roth IRA. You do not include in gross income any part
of a distribution from a traditional IRA that is a return of your basis, as
discussed later.
If you must include any amount in your gross income, you may have to
increase your withholding or make estimated tax payments. See chapter 4.
Recharacterizations
You may be able to treat a contribution made to one type of IRA as having
been made to a different type of IRA. This is called recharacterizing the
contribution. More detailed information is in Publication 590.
How to recharacterize a contribution. To recharacterize a contribution,
you generally must have the contribution transferred from the first IRA
(the one to which it was made) to the second IRA in a trustee-to-trustee
transfer. If the transfer is made by the due date (including extensions)
for your tax return for the year during which the contribution was made,
you can elect to treat the contribution as having been originally made to
the second IRA instead of to the first IRA. If you recharacterize your
contribution, you must do all three of the following.
*
Include in the transfer any net income allocable to the contribution.
If there was a loss, the net income you must transfer may be a negative amount.
*
Report the recharacterization on your tax return for the year during
which the contribution was made.
*
Treat the contribution as having been made to the second IRA on the
date that it was actually made to the first IRA.
No deduction allowed. You cannot deduct the contribution to the first
IRA. Any net income you transfer with the recharacterized contribution is
treated as earned in the second IRA.
Required notifications. To recharacterize a contribution, you must notify
both the trustee of the first IRA (the one to which the contribution was
actually made) and the trustee of the second IRA (the one to which the
contribution is being moved) that you have elected to treat the
contribution as having been made to the second IRA rather than the first.
You must make the notifications by the date of the transfer. Only one
notification is required if both IRAs are maintained by the same trustee.
The notification(s) must include all of the following information.
*
The type and amount of the contribution to the first IRA that is to
be recharacterized.
*
The date on which the contribution was made to the first IRA and the
year for which it was made.
*
A direction to the trustee of the first IRA to transfer in a
trustee-to-trustee transfer the amount of the contribution and any net
income (or loss) allocable to the contribution to the trustee of the second
IRA.
*
The name of the trustee of the first IRA and the name of the trustee
of the second IRA.
*
Any additional information needed to make the transfer.
Reporting a recharacterization. If you elect to recharacterize a
contribution to one IRA as a contribution to another IRA, you must report
the recharacterization on your tax return as directed by Form 8606 and its
instructions. You must treat the contribution as having been made to the
second IRA.
When Can You Withdraw or Use IRA Assets?
There are rules limiting use of your IRA assets and distributions from it.
Violation of the rules generally results in additional taxes in the year of
violation. See What Acts Result in Penalties or Additional Taxes, later.
Contributions returned before the due date of return. If you made IRA
contributions in 2005, you can withdraw them tax free by the due date of
your return. If you have an extension of time to file your return, you can
withdraw them tax free by the extended due date. You can do this if, for
each contribution you withdraw, both of the following conditions apply.
*
You did not take a deduction for the contribution.
*
You withdraw any interest or other income earned on the contribution.
You can take into account any loss on the contribution while it was in the
IRA when calculating the amount that must be withdrawn. If there was a
loss, the net income earned on the contribution may be a negative amount.
Note.
To calculate the amount you must withdraw, see Publication 590.
Earnings includible in income. You must include in income any earnings on
the contributions you withdraw. Include the earnings in income for the year
in which you made the contributions, not in the year in which you withdraw
them.
Caution
Generally, except for any part of a withdrawal that is a return of
nondeductible contributions (basis), any withdrawal of your contributions
after the due date (or extended due date) of your return will be treated as
a taxable distribution. Excess contributions can also be recovered tax free
as discussed under What Acts Result in Penalties or Additional Taxes, later.
Early distributions tax. The 10% additional tax on distributions made
before you reach age 59˝ does not apply to these tax-free withdrawals of
your contributions. However, the distribution of interest or other income
must be reported on Form 5329 and, unless the distribution qualifies as an
exception to the age 59˝ rule, it will be subject to this tax.
When Must You Withdraw IRA Assets? (Required Minimum Distributions)
You cannot keep funds in a traditional IRA indefinitely. Eventually they
must be distributed. If there are no distributions, or if the distributions
are not large enough, you may have to pay a 50% excise tax on the amount
not distributed as required. See Excess Accumulations (Insufficient
Distributions), later. The requirements for distributing IRA funds differ
depending on whether you are the IRA owner or the beneficiary of a
decedent's IRA.
Required minimum distribution. The amount that must be distributed each
year is referred to as the required minimum distribution.
Required distributions not eligible for rollover. Amounts that must be
distributed (required minimum distributions) during a particular year are
not eligible for rollover treatment.
IRA owners. If you are the owner of a traditional IRA, you must start
receiving distributions from your IRA by April 1 of the year following the
year in which you reach age 70˝. April 1 of the year following the year in
which you reach age 70˝ is referred to as the required beginning date.
Distributions by the required beginning date. You must receive at least a
minimum amount for each year starting with the year you reach age 70˝ (your
70˝ year). If you do not (or did not) receive that minimum amount in your
70˝ year, then you must receive distributions for your 70˝ year by April 1
of the next year.
If an IRA owner dies after reaching age 70˝, but before April 1 of the
next year, no minimum distribution is required because death occurred
before the required beginning date.
Caution
Even if you begin receiving distributions before you attain age 70˝, you
must begin calculating and receiving required minimum distributions by your
required beginning date.
Distributions after the required beginning date. The required minimum
distribution for any year after the year you turn 70˝ must be made by
December 31 of that later year.
Beneficiaries. If you are the beneficiary of a decedent's traditional
IRA, the requirements for distributions from that IRA generally depend on
whether the IRA owner died before or after the required beginning date for
distributions.
More information. For more information, including how to figure your
minimum required distribution each year and how to figure your required
distribution if you are a beneficiary of a decedent's IRA, see Publication 590.
Are Distributions Taxable?
In general, distributions from a traditional IRA are taxable in the year
you receive them.
Exceptions. Exceptions to distributions from traditional IRAs being
taxable in the year you receive them are:
*
Rollovers,
*
Tax-free withdrawals of contributions, discussed earlier, and
*
The return of nondeductible contributions, discussed later under
Distributions Fully or Partly Taxable.
Caution
Although a conversion of a traditional IRA is considered a rollover for
Roth IRA purposes, it is not an exception to the rule that distributions
from a traditional IRA are taxable in the year you receive them. Conversion
distributions are includible in your gross income subject to this rule and
the special rules for conversions explained in Publication 590.
Ordinary income. Distributions from traditional IRAs that you include in
income are taxed as ordinary income.
No special treatment. In figuring your tax, you cannot use the 10-year
tax option or capital gain treatment that applies to lump-sum distributions
from qualified employer plans.
Distributions Fully or Partly Taxable
Distributions from your traditional IRA may be fully or partly taxable,
depending on whether your IRA includes any nondeductible contributions.
Fully taxable. If only deductible contributions were made to your
traditional IRA (or IRAs, if you have more than one), you have no basis in
your IRA. Because you have no basis in your IRA, any distributions are
fully taxable when received. See Reporting taxable distributions on your
return, later.
Partly taxable. If you made nondeductible contributions to any of your
traditional IRAs, you have a cost basis (investment in the contract) equal
to the amount of those contributions. These nondeductible contributions are
not taxed when they are distributed to you. They are a return of your
investment in your IRA.
Only the part of the distribution that represents nondeductible
contributions (your cost basis) is tax free. If nondeductible contributions
have been made, distributions consist partly of nondeductible contributions
(basis) and partly of deductible contributions, earnings, and gains (if
there are any). Until all of your basis has been distributed, each
distribution is partly nontaxable and partly taxable.
Form 8606. You must complete Form 8606 and attach it to your return if
you receive a distribution from a traditional IRA and have ever made
nondeductible contributions to any of your traditional IRAs. Using the
form, you will figure the nontaxable distributions for 2005 and your total
IRA basis for 2005 and earlier years.
Note.
If you are required to file Form 8606, but you are not required to file an
income tax return, you still must file Form 8606. Send it to the IRS at the
time and place you would otherwise file an income tax return.
Distributions reported on Form 1099-R. If you receive a distribution from
your traditional IRA, you will receive Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., or a similar statement. IRA distributions are shown in
boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you
what type of distribution you received from your IRA.
Withholding. Federal income tax is withheld from distributions from
traditional IRAs unless you choose not to have tax withheld. See chapter 4.
IRA distributions delivered outside the United States. In general, if you
are a U.S. citizen or resident alien and your home address is outside the
United States or its possessions, you cannot choose exemption from
withholding on distributions from your traditional IRA.
Reporting taxable distributions on your return. Report fully taxable
distributions, including early distributions on Form 1040, line 15b, or
Form 1040A, line 11b (no entry is required on Form 1040, line 15a, or Form
1040A, line 11a). If only part of the distribution is taxable, enter the
total amount on Form 1040, line 15a, or Form 1040A, line 11a, and the
taxable part on Form 1040, line 15b, or Form 1040A, line 11b. You cannot
report distributions on Form 1040EZ.
What Acts Result in Penalties or Additional Taxes?
The tax advantages of using traditional IRAs for retirement savings can be
offset by additional taxes and penalties if you do not follow the rules.
There are additions to the regular tax for using your IRA funds in
prohibited transactions. There are also additional taxes for the following
activities.
*
Investing in collectibles.
*
Making excess contributions.
*
Taking early distributions.
*
Allowing excess amounts to accumulate (failing to take required
distributions).
There are penalties for overstating the amount of nondeductible
contributions and for failure to file a Form 8606, if required.
Prohibited Transactions
Generally, a prohibited transaction is any improper use of your traditional
IRA by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family
(spouse, ancestor, lineal descendent, and any spouse of a lineal descendent).
The following are examples of prohibited transactions with a traditional IRA.
*
Borrowing money from it.
*
Selling property to it.
*
Receiving unreasonable compensation for managing it.
*
Using it as security for a loan.
*
Buying property for personal use (present or future) with IRA funds.
Effect on an IRA account. Generally, if you or your beneficiary engages
in a prohibited transaction in connection with your traditional IRA account
at any time during the year, the account stops being an IRA as of the first
day of that year.
Effect on you or your beneficiary. If your account stops being an IRA
because you or your beneficiary engaged in a prohibited transaction, the
account is treated as distributing all its assets to you at their fair
market values on the first day of the year. If the total of those values is
more than your basis in the IRA, you will have a taxable gain that is
includible in your income. For information on figuring your gain and
reporting it in income, see Are Distributions Taxable, earlier. The
distribution may be subject to additional taxes or penalties.
Taxes on prohibited transactions. If someone other than the owner or
beneficiary of a traditional IRA engages in a prohibited transaction, that
person may be liable for certain taxes. In general, there is a 15% tax on
the amount of the prohibited transaction and a 100% additional tax if the
transaction is not corrected.
More information. For more information on prohibited transactions, see
Publication 590.
Investment in Collectibles
If your traditional IRA invests in collectibles, the amount invested is
considered distributed to you in the year invested. You may have to pay the
10% additional tax on early distributions, discussed later.
Collectibles. These include:
*
Art works,
*
Rugs,
*
Antiques,
*
Metals,
*
Gems,
*
Stamps,
*
Coins,
*
Alcoholic beverages, and
*
Certain other tangible personal property.
Exception. Your IRA can invest in one, one-half, one-quarter, or
one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the
Treasury Department. It can also invest in certain platinum coins and
certain gold, silver, palladium, and platinum bullion.
Excess Contributions
Generally, an excess contribution is the amount contributed to your
traditional IRA(s) for the year that is more than the smaller of the
following amounts.
*
The maximum deductible amount for the year. For 2005, this is $4,000
($4,500 if you are 50 or older).
*
Your taxable compensation for the year.
Tax on excess contributions. In general, if the excess contributions for
a year are not withdrawn by the date your return for the year is due
(including extensions), you are subject to a 6% tax. You must pay the 6%
tax each year on excess amounts that remain in your traditional IRA at the
end of your tax year. The tax cannot be more than 6% of the value of your
IRA as of the end of your tax year.
Excess contributions withdrawn by due date of return. You will not have
to pay the 6% tax if you withdraw an excess contribution made during a tax
year and you also withdraw interest or other income earned on the excess
contribution. You must complete your withdrawal by the date your tax return
for that year is due, including extensions.
How to treat withdrawn contributions. Do not include in your gross income
an excess contribution that you withdraw from your traditional IRA before
your tax return is due if both the following conditions are met.
*
No deduction was allowed for the excess contribution.
*
You withdraw the interest or other income earned on the excess
contribution.
You can take into account any loss on the contribution while it was in the
IRA when calculating the amount that must be withdrawn. If there was a
loss, the net income you must withdraw may be a negative amount.
How to treat withdrawn interest or other income. You must include in your
gross income the interest or other income that was earned on the excess
contribution. Report it on your return for the year in which the excess
contribution was made. Your withdrawal of interest or other income may be
subject to an additional 10% tax on early distributions, discussed later.
Excess contributions withdrawn after due date of return. In general, you
must include all distributions (withdrawals) from your traditional IRA in
your gross income. However, if the following conditions are met, you can
withdraw excess contributions from your IRA and not include the amount
withdrawn in your gross income.
*
Total contributions (other than rollover contributions) for 2005 to
your IRA were not more than $4,000 ($4,500 if you are 50 or older).
*
You did not take a deduction for the excess contribution being withdrawn.
The withdrawal can take place at any time, even after the due date,
including extensions, for filing your tax return for the year.
Excess contribution deducted in an earlier year. If you deducted an
excess contribution in an earlier year for which the total contributions
were not more than the maximum deductible amount for that year ($2,000 for
2001 and earlier years, $3,000 for 2002 through 2004 ($3,500 for 2002
through 2004 if you were 50 or older)), you can still remove the excess
from your traditional IRA and not include it in your gross income. To do
this, file Form 1040X, Amended U.S. Individual Income Tax Return, for that
year and do not deduct the excess contribution on the amended return.
Generally, you can file an amended return within 3 years after you filed
your return, or 2 years from the time the tax was paid, whichever is later.
Excess due to incorrect rollover information. If an excess contribution
in your traditional IRA is the result of a rollover and the excess occurred
because the information the plan was required to give you was incorrect,
you can withdraw the excess contribution. The limits mentioned above are
increased by the amount of the excess that is due to the incorrect
information. You will have to amend your return for the year in which the
excess occurred to correct the reporting of the rollover amounts in that
year. Do not include in your gross income the part of the excess
contribution caused by the incorrect information.
Early Distributions
You must include early distributions of taxable amounts from your
traditional IRA in your gross income. Early distributions are also subject
to an additional 10% tax. See the discussion of Form 5329 under Reporting
Additional Taxes, later, to figure and report the tax.
Early distributions defined. Early distributions generally are amounts
distributed from your traditional IRA account or annuity before you are age
59˝.
Age 59˝ rule. Generally, if you are under age 59˝, you must pay a 10%
additional tax on the distribution of any assets (money or other property)
from your traditional IRA. Distributions before you are age 59˝ are called
early distributions.
The 10% additional tax applies to the part of the distribution that you
have to include in gross income. It is in addition to any regular income
tax on that amount.
Exceptions. There are several exceptions to the age 59˝ rule. Even if you
receive a distribution before you are age 59˝, you may not have to pay the
10% additional tax if you are in one of the following situations.
*
You have unreimbursed medical expenses that are more than 7.5% of
your adjusted gross income.
*
The distributions are not more than the cost of your medical insurance.
*
You are disabled.
*
You are the beneficiary of a deceased IRA owner.
*
You are receiving distributions in the form of an annuity.
*
The distributions are not more than your qualified higher education
expenses.
*
You use the distributions to buy, build, or rebuild a first home.
*
The distribution is due to an IRS levy of the qualified plan.
Most of these exceptions are explained in Publication 590.
Note.
Distributions that are timely and properly rolled over, as discussed
earlier, are not subject to either regular income tax or the 10% additional
tax. Certain withdrawals of excess contributions after the due date of your
return are also tax free and therefore not subject to the 10% additional
tax. (See Excess contributions withdrawn after due date of return,
earlier.) This also applies to transfers incident to divorce, as discussed
earlier.
Additional 10% tax. The additional tax on early distributions is 10% of
the amount of the early distribution that you must include in your gross
income. This tax is in addition to any regular income tax resulting from
including the distribution in income.
Nondeductible contributions. The tax on early distributions does not
apply to the part of a distribution that represents a return of your
nondeductible contributions (basis).
More information. For more information on early distributions, see
Publication 590.
Excess Accumulations (Insufficient Distributions)
You cannot keep amounts in your traditional IRA indefinitely. Generally,
you must begin receiving distributions by April 1 of the year following the
year in which you reach age 70˝. The required minimum distribution for any
year after the year in which you reach age 70˝ must be made by December 31
of that later year.
Tax on excess. If distributions are less than the required minimum
distribution for the year, you may have to pay a 50% excise tax for that
year on the amount not distributed as required.
Request to excuse the tax. If the excess accumulation is due to
reasonable error, and you have taken, or are taking, steps to remedy the
insufficient distribution, you can request that the tax be excused.
If you believe you qualify for this relief, do the following.
*
File Form 5329 with your Form 1040.
*
Pay any tax you owe on excess accumulations.
*
Attach a letter of explanation.
If the IRS approves your request, it will refund the excess accumulations
tax you paid.
Exemption from tax. If you are unable to take required distributions
because you have a traditional IRA invested in a contract issued by an
insurance company that is in state insurer delinquency proceedings, the 50%
excise tax does not apply if the conditions and requirements of Revenue
Procedure 92-10 are satisfied.
More information. For more information on excess accumulations, see
Publication 590.
Reporting Additional Taxes
Generally, you must use Form 5329 to report the tax on excess
contributions, early distributions, and excess accumulations. If you must
file Form 5329, you cannot use Form 1040A or Form 1040EZ.
Filing a tax return. If you must file an individual income tax return,
complete Form 5329 and attach it to your Form 1040. Enter the total amount
of additional taxes due on Form 1040, line 60.
Not filing a tax return. If you do not have to file a tax return but do
have to pay one of the additional taxes mentioned earlier, file the
completed Form 5329 with the IRS at the time and place you would have filed
your Form 1040. Be sure to include your address on page 1 and your
signature and date on page 2. Enclose, but do not attach, a check or money
order payable to the United States Treasury for the tax you owe, as shown
on Form 5329. Enter your social security number and “2005 Form 5329” on
your check or money order.
Form 5329 not required. You do not have to use Form 5329 if either of the
following situations exist.
*
Distribution code 1 (early distribution) is correctly shown in box 7
of all Forms 1099-R. If you do not owe any other additional tax on a
distribution, multiply the taxable part of the early distribution by 10%
and enter the result on Form 1040, line 60. Put “No” to the left of line 60
to indicate that you do not have to file Form 5329. However, if you owe
this tax and also owe any other additional tax on a distribution, do not
enter this 10% additional tax directly on your Form 1040. You must file
Form 5329 to report your additional taxes.
*
If you rolled over part or all of a distribution from a qualified
retirement plan, the part rolled over is not subject to the tax on early
distributions.
Roth IRAs
Regardless of your age, you may be able to establish and make nondeductible
contributions to a retirement plan called a Roth IRA.
Contributions not reported. You do not report Roth IRA contributions on
your return.
What Is a Roth IRA?
A Roth IRA is an individual retirement plan that, except as explained in
this chapter, is subject to the rules that apply to a traditional IRA
(defined earlier). It can be either an account or an annuity. Individual
retirement accounts and annuities are described in Publication 590.
To be a Roth IRA, the account or annuity must be designated as a Roth IRA
when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP-IRA
nor a SIMPLE IRA can be designated as a Roth IRA.
Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA.
But, if you satisfy the requirements, qualified distributions (discussed
later) are tax free. Contributions can be made to your Roth IRA after you
reach age 70˝ and you can leave amounts in your Roth IRA as long as you live.
When Can a Roth IRA Be Set Up?
You can set up a Roth IRA at any time. However, the time for making
contributions for any year is limited. See When Can You Make Contributions,
later under Can You Contribute to a Roth IRA?
Can You Contribute to a Roth IRA?
Generally, you can contribute to a Roth IRA if you have taxable
compensation (defined later) and your modified AGI (defined later) is less
than:
*
$160,000 for married filing jointly or qualifying widow(er),
*
$10,000 for married filing separately and you lived with your spouse
at any time during the year, or
*
$110,000 for single, head of household, or married filing separately
and you did not live with your spouse at any time during the year.
Tip
You may be eligible to claim a credit for contributions to your Roth IRA.
For more information, see chapter 37.
Is there an age limit for contributions? Contributions can be made to
your Roth IRA regardless of your age.
Can you contribute to a Roth IRA for your spouse? You can contribute to a
Roth IRA for your spouse provided the contributions satisfy the spousal IRA
limit (discussed in How Much Can Be Contributed under Traditional IRAs),
you file jointly, and your modified AGI is less than $160,000.
Compensation. Compensation includes wages, salaries, tips, professional
fees, bonuses, and other amounts received for providing personal services.
It also includes commissions, self-employment income, and taxable alimony
and separate maintenance payments.
Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted
gross income (AGI) as shown on your return modified as follows.
1.
Subtract the following:
1.
Conversion income. This is any income resulting from the
conversion of an IRA (other than a Roth IRA) to a Roth IRA.
2.
Minimum required distributions from qualified retirement plans
(including IRAs) (for conversions only).
2.
Add the following deductions and exclusions:
1.
Traditional IRA deduction,
2.
Student loan interest deduction,
3.
Tuition and fees deduction,
4.
Foreign earned income exclusion,
5.
Foreign housing exclusion or deduction,
6.
Exclusion of qualified savings bond interest shown on Form
8815, and
7.
Exclusion of employer-provided adoption benefits shown on Form
8839.
8.
Domestic production activities deduction from Form 1040, line
35, or Form 1040NR, line 33.
You can use Worksheet 17-2 to figure your modified AGI.
Worksheet 17-2. Modified Adjusted Gross Income for Roth IRA Purposes
Use this worksheet to figure your modified adjusted gross income for
Roth IRA purposes.
1. Enter your adjusted gross income (Form 1040, line 38, or
Form 1040A, line 22) 1.
2. Enter any income resulting from the conversion of an IRA
(other than a Roth IRA) to a Roth IRA or a minimum required distribution
from an IRA (if figuring MAGI for conversion purposes) 2.
3. Subtract line 2 from line 1 3.
4. Enter any traditional IRA deduction (Form 1040, line 32, or
Form 1040A, line 17) 4.
5. Enter any student loan interest deduction (Form 1040,
line 33, or Form 1040A, line 18) 5.
6. Enter any tuition and fees deduction (Form 1040, line 34, or
Form 1040A, line 19) 6.
7. Enter any foreign earned income and/or housing exclusion
(Form 2555, line 43, or Form 2555-EZ, line 18) 7.
8. Enter any foreign housing deduction (Form 2555, line 48) 8.
9. Enter any exclusion of bond interest (Form 8815, line 14) 9.
10. Enter any exclusion of employer-provided adoption benefits
(Form 8839, line 30) 10.
11. Enter any domestic production activities deduction (Form 1040, line
35 or Form 1040NR, line 33) 11.
12. Add the amounts on lines 3 through 11 12.
13. Enter:
•$160,000 if married filing jointly or qualifying widow(er)
•$10,000 if married filing separately and you lived with your
spouse at any time during the year
•$110,000 for all others 13.
Next.
If yes,
If no, Is the amount on line 12 more than the amount on line 13?
then see the Note below.
then the amount on line 12 is your modified AGI for Roth IRA purposes.
Note. If the amount on line 12 is more than the amount on line 13 and
you have other income or loss items, such as social security income or
passive activity losses, that are subject to AGI-based phaseouts, you can
refigure your AGI solely for the purpose of figuring your modified AGI for
Roth IRA purposes. When figuring your modified AGI for conversion purposes,
or minimum required distributions from IRAs, refigure your AGI without
taking into account any income from conversions. (If you receive social
security benefits, use Worksheet 1 in Appendix B of Publication 590 to
refigure your AGI.) Then go to list item (2) under Modified AGI or line 4
above in Worksheet 17-2 to refigure your modified AGI. If you do not have
other income or loss items subject to AGI-based phaseouts, your modified
AGI for Roth IRA purposes is the amount on line 12.
How Much Can Be Contributed?
The contribution limit for Roth IRAs depends on whether contributions are
made only to Roth IRAs or to both traditional IRAs and Roth IRAs.
Roth IRAs only. If contributions are made only to Roth IRAs, your
contribution limit generally is the lesser of the following amounts.
*
$4,000 ($4,500 if you are 50 or older in 2005). For 2006, the amount
is $4,000 (and increases to $5,000 if you are 50 or older in 2006).
*
Your taxable compensation.
However, if your modified AGI is above a certain amount, your contribution
limit may be reduced, as explained later under Contribution limit reduced.
Roth IRAs and traditional IRAs. If contributions are made to both Roth
IRAs and traditional IRAs established for your benefit, your contribution
limit for Roth IRAs generally is the same as your limit would be if
contributions were made only to Roth IRAs, but then reduced by all
contributions (other than employer contributions under a SEP or SIMPLE IRA
plan) for the year to all IRAs other than Roth IRAs.
This means that your contribution limit is the lesser of the following
amounts.
*
$4,000 ($4,500 if you are 50 or older in 2005). For 2006, $4,000
($5,000 if you are 50 or older in 2006) minus all contributions (other than
employer contributions under a SEP or SIMPLE IRA plan) for the year to all
IRAs other than Roth IRAs.
*
Your taxable compensation minus all contributions (other than
employer contributions under a SEP or SIMPLE IRA plan) for the year to all
IRAs other than Roth IRAs.
However, if your modified AGI is above a certain amount, your contribution
limit may be reduced, as explained later under Contribution limit reduced.
Contribution limit reduced. If your modified AGI is above a certain
amount, your contribution limit is gradually reduced. Use Table 17-3 to
determine if this reduction applies to you.
Table 17-3. Effect of Modified AGI on Roth IRA Contribution
This table shows whether your contribution to a Roth IRA is affected by
the amount of your modified adjusted gross income (modified AGI).
IF you have taxable compensation and your filing status is... AND your
modified
AGI is... THEN...
married filing jointly, or
qualifying widow(er) less than $150,000 you can contribute up to
$4,000 ($4,500 if you are 50 or older in 2005). For 2006, this amount is
$4,000 ($5,000 if you are 50 or older in 2006).
at least $150,000
but less than $160,000 the amount you can contribute is reduced as
explained under Contribution limit reduced in Publication 590.
$160,000 or more you cannot contribute to a Roth IRA.
married filing separately and you lived with your spouse at any time during
the year zero (-0-) you can contribute up to $4,000 ($4,500 if you
are 50 or older in 2005). For 2006, this amount is $4,000 ($5,000 if you
are 50 or older in 2006).
more than zero (-0-)
but less than $10,000 the amount you can contribute is reduced as
explained under Contribution limit reduced in Publication 590.
$10,000 or more you cannot contribute to a Roth IRA.
single,
head of household, or married filing separately and you did not live with
your spouse at any time during the year less than $95,000 you can
contribute up to $4,000 ($4,500 if you are 50 or older in 2005). For 2006,
this amount is $4,000 ($5,000 if you are 50 or older in 2006).
at least $95,000
but less than $110,000 the amount you can contribute is reduced as
explained under Contribution limit reduced in Publication 590.
$110,000 or more you cannot contribute to a Roth IRA.
Figuring the reduction. If the amount you can contribute to your Roth IRA
is reduced, see Publication 590 for how to figure the reduction.
When Can You Make Contributions?
You can make contributions to a Roth IRA for a year at any time during the
year or by the due date of your return for that year (not including
extensions).
Tip
You can make contributions for 2005 by the due date (not including
extensions) for filing your 2005 tax return. This means that most people
can make contributions for 2005 by April 17, 2006.
What If You Contribute Too Much?
A 6% excise tax applies to any excess contribution to a Roth IRA.
Excess contributions. These are the contributions to your Roth IRAs for a
year that equal the total of:
1.
Amounts contributed for the tax year to your Roth IRAs (other than
amounts properly and timely rolled over from a Roth IRA or properly
converted from a traditional IRA, as described later) that are more than
your contribution limit for the year, plus
2.
Any excess contributions for the preceding year, reduced by the total of:
1.
Any distributions out of your Roth IRAs for the year, plus
2.
Your contribution limit for the year minus your contributions
to all your IRAs for the year.
Withdrawal of excess contributions. For purposes of determining excess
contributions, any contribution that is withdrawn on or before the due date
(including extensions) for filing your tax return for the year is treated
as an amount not contributed. This treatment applies only if any earnings
on the contributions are also withdrawn. The earnings are considered to
have been earned and received in the year the excess contribution was made.
Applying excess contributions. If contributions to your Roth IRA for a
year were more than the limit, you can apply the excess contribution in one
year to a later year if the contributions for that later year are less than
the maximum allowed for that year.
Can You Move Amounts Into a Roth IRA?
You may be able to convert amounts from either a traditional, SEP, or
SIMPLE IRA into a Roth IRA. You may be able to recharacterize contributions
made to one IRA as having been made directly to a different IRA. You can
roll amounts over from one Roth IRA to another Roth IRA.
Conversions
You can convert a traditional IRA to a Roth IRA. The conversion is treated
as a rollover, regardless of the conversion method used. Most of the rules
for rollovers, described earlier under Rollover From One IRA Into Another
under Traditional IRAs, apply to these rollovers. However, the 1-year
waiting period does not apply.
Conversion methods. You can convert amounts from a traditional IRA to a
Roth IRA in any of the following ways.
*
Rollover. You can receive a distribution from a traditional IRA and
roll it over (contribute it) to a Roth IRA within 60 days after the
distribution.
*
Trustee-to-trustee transfer. You can direct the trustee of the
traditional IRA to transfer an amount from the traditional IRA to the
trustee of the Roth IRA.
*
Same trustee transfer. If the trustee of the traditional IRA also
maintains the Roth IRA, you can direct the trustee to transfer an amount
from the traditional IRA to the Roth IRA.
Same trustee. Conversions made with the same trustee can be made by
redesignating the traditional IRA as a Roth IRA, rather than opening a new
account or issuing a new contract.
Converting from a SIMPLE IRA. Generally, you can convert an amount in
your SIMPLE IRA to a Roth IRA under the same rules explained earlier under
Converting From Any Traditional IRA to a Roth IRA.
However, you cannot convert any amount distributed from the SIMPLE IRA
during the 2-year period beginning on the date you first participated in
any SIMPLE IRA plan maintained by your employer.
More information. For more detailed information on conversions, see
Publication 590.
Failed Conversions
If, when you converted amounts from a traditional IRA into a Roth IRA, you
expected to have modified AGI of less than $100,000 and a filing status
other than married filing separately, but your expectations did not come
true, you have made a failed conversion.
Results of failed conversions. If the converted amount (contribution) is
not recharacterized (explained earlier), the contribution will be treated
as a regular contribution to the Roth IRA and subject to the following tax
consequences.
*
A 6% excise tax per year will apply to any excess contribution not
withdrawn from the Roth IRA.
*
The distributions from the traditional IRA must be included in your
gross income.
*
The 10% additional tax on early distributions may apply to any
distribution.
How to avoid. You must move the amount converted (including all earnings
from the date of conversion) into a traditional IRA by the due date
(including extensions) for your tax return for the year during which you
made the conversion to the Roth IRA. You do not have to include this
distribution (withdrawal) in income. See Recharacterizations, earlier, for
more information.
Rollover From a Roth IRA
You can withdraw, tax free, all or part of the assets from one Roth IRA if
you contribute them within 60 days to another Roth IRA. Most of the rules
for rollovers, explained earlier under Rollover From One IRA Into Another
under Traditional IRAs, apply to these rollovers.
Are Distributions Taxable?
You do not include in your gross income qualified distributions or
distributions that are a return of your regular contributions from your
Roth IRA(s). You also do not include distributions from your Roth IRA that
you roll over tax free into another Roth IRA. You may have to include part
of other distributions in your income. See Ordering rules for
distributions, later.
What are qualified distributions? A qualified distribution is any payment
or distribution from your Roth IRA that meets the following requirements.
1.
It is made after the 5-year period beginning with the first taxable
year for which a contribution was made to a Roth IRA set up for your
benefit, and
2.
The payment or distribution is:
1.
Made on or after the date you reach age 59˝,
2.
Made because you are disabled,
3.
Made to a beneficiary or to your estate after your death, or
4.
To pay up to $10,000 (lifetime limit) of certain qualified
first-time homebuyer amounts. See Publication 590 for more information.
Additional tax on distributions of conversion contributions within 5-year
period. If, within the 5-year period starting with the first day of your
tax year in which you convert an amount from a traditional IRA to a Roth
IRA, you take a distribution from a Roth IRA, you may have to pay the 10%
additional tax on early distributions. You generally must pay the 10%
additional tax on any amount attributable to the part of the amount
converted (the conversion contribution) that you had to include in income.
A separate 5-year period applies to each conversion. See Ordering rules for
distributions, later, to determine the amount, if any, of the distribution
that is attributable to the part of the conversion contribution that you
had to include in income.
Additional tax on other early distributions. Unless an exception applies,
the taxable part of other distributions from your Roth IRA(s) that are not
qualified distributions is subject to the 10% additional tax on early
distributions. See Publication 590 for more information.
Ordering rules for distributions. If you receive a distribution from your
Roth IRA that is not a qualified distribution, part of it may be taxable.
There is a set order in which contributions (including conversion
contributions) and earnings are considered to be distributed from your Roth
IRA. Regular contributions are distributed first. See Publication 590 for
more information.
Must you withdraw or use Roth IRA assets? You are not required to take
distributions from your Roth IRA at any age. The minimum distribution rules
that apply to traditional IRAs do not apply to Roth IRAs while the owner is
alive. However, after the death of a Roth IRA owner, certain of the minimum
distribution rules that apply to traditional IRAs also apply to Roth IRAs.
More information. For more detailed information on Roth IRAs, see
Publication 590.
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