An Individual Retirement Arrangement (IRA) is a tax-deferred savings plan for retirement. Earnings on a traditional IRA are not subject to tax until they are withdrawn. Contributions are limited to a combined total of $5,500 per year per taxpayer ($6,500 if at least age 50). IRAs are available to all taxpayers with earned income during the year.
You may qualify for a credit of 50%, 20%, or 10% on the first $2,000 contributed to a retirement savings plan. This credit is for taxpayers with modified adjusted gross incomes of up to $61,000 if Married Filing Jointly, $45,750 if Head of Household, and $30,500 for all other filing statuses. This credit is in addition to any IRA deduction claimed on the return.
An IRA may be established as a:
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You can contribute up to $5,500 per year to your traditional IRA and you may be able to deduct the contribution directly from the income on your tax return. If you are at least age 50, you may contribute up to $6,500. If you are covered by your employer's pension plan, the contribution is only fully deductible if your modified adjusted gross income is below $61,000. If you are married filing a joint return and both of you are covered by a pension plan, your contributions are fully deductible only if your modified adjusted gross income is below $98,000. The deductible contribution is reduced or eliminated as your income increases. If you and your spouse both work and one of you is not covered by a pension plan, the income limits for fully deductible contributions are different for each of you. If you are not covered by a pension plan, any contribution up to $5,500 ($6,500 if age 50 or older) is deductible from your income regardless of the amount of earnings. All distributions from deductible traditional IRAs are taxable.
If you are covered by a pension plan, depending on your filing status and modified adjusted gross income, all or part of your traditional IRA contribution may be nondeductible. Form 8606, Nondeductible IRAs, must be completed each year a nondeductible IRA contribution is made. When a distribution is received, Form 8606 is used to determine how much of the distribution is taxable.
The Roth IRA was first available in 1998 and is subject to most of the rules of the original (traditional) IRAs.
The Roth IRA also allows you to contribute up to $5,500 per year ($6,500 if age 50 or older) but there is no deduction from your income for the contribution. Qualified distributions are not taxable. Once your modified adjusted gross income reaches $116,000 ($183,000 if married filing a joint return), your allowable contribution begins to be reduced.
Generally, you must participate in a Roth IRA for at least five years and be over age 59½ to receive a distribution from a Roth IRA without being assessed a 10% additional tax for early withdrawal.
Finally, there is an option available to taxpayers to convert their traditional IRA to a Roth IRA. There is no maximum income limitation for conversions so you can convert your traditional IRA to a Roth IRA at any time.
Generally, you must pay taxes on all of the distribution you convert, except any existing nondeductible contributions. The conversion amount is exempt from the 10% additional tax.
If you work and your spouse does not, you may set up an IRA for each of you and contribute up to $5,500 per person per year into each IRA ($6,500 if age 50 or older) to each IRA. When determining deductibility of the IRA contributions, the nonworking spouse is not considered to be covered by a pension plan. If the working spouse is covered by a pension plan, your allowable deductible contributions are limited once your adjusted gross income reaches $183,000.
If you have a qualified plan through your employer that maintains a separate account for each employee and you make voluntary contributions to that account, the account is deemed a traditional IRA or Roth IRA if the account otherwise meets the requirements of a traditional IRA.
Except for the Portion of a distribution that represents nondeductible contributions, any funds withdrawn before age 59½ from a traditional or a Roth IRA will be subject to a 10% additional tax for early withdrawal unless an exception applies. Some exceptions to this additional tax are:
Although distributions from a Roth IRA are not required at any age, under traditional IRA rules, you must withdraw the entire balance of your IRAs or start receiving periodic distributions by April 1 of the year following the year in which you reach age 70½. The withdrawals must occur on a yearly basis and continue until you die or until your IRAs are depleted.
If you have more than one IRA, you may take the minimum required distribution from any one or more of the individual IRAs.
If you are age 70 ½ or older you may make a direct charitable contribution of up to $100,000 tax-free from your traditional IRAs. The contribution must be a trustee-to-trustee transfer which means the institution that handles your IRA must send the money to the charitable organization for you. Not only is this a tax-free distribution, but you can include the charitable contribution in your required minimum distribution amount.
Distributions from a Roth IRA are not required at any age.