Traditional IRA
WHAT IS AN INDIVIDUAL RETIREMENT ANNUITY (IRA)?
A Traditional IRA is a personal retirement plan to which eligible participants can make taxdeductible and non-deductible contributions each year.
AM I ELIGIBLE TO SET UP AN IRA?
Provided that you are under the age of 701⁄2 at the close of the tax year and have earned income during the tax year in question, an IRA may be established. Most IRA owners invest in an IRA in order to make a deductible contribution, rather than a non-deductible contribution. In order to qualify for a deductible contribution, an additional question must be answered. Have you or your spouse been an active participant in an employer-sponsored plan in any part of the plan year? A good rule of thumb for determining the answer to this question is to look at your W-2, since your employer is required to report your active status with regard to such plans. If it is determined that you are an active participant in an employer-sponsored plan, the deduction for the contributions made to the IRA may be reduced or eliminated. For 2010, 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) for your applicable tax filing status is with the ranges of the following chart:
|
|
|
|
|---|---|---|---|
2010 |
$56,000 -$66,000 |
$89,000 -$109,000 |
$0 -$10,000 |
As an example, assume that a client is a single individual and is currently an active participant in an Employee-Sponsored Plan. If this individual’s income in 2010 is under $56,000, the IRA contribution is fully deductible since this income falls under the phase-out range. If the client’s income is $60,000, a portion of the contribution will be deductible. However, if the contributing individual’s income is over $66,000, the contribution is entirely non-deductible. Note that if you file a joint return and you are not a participant in an Employee-Sponsored Plan, but your spouse is an active participant, the deduction for the contribution may be reduced or eliminated. The phase out range for 2009 is $166,000-$176,000. (See IRS Pub 590 for more details.)
If you and your spouse are not active participants in an employer-sponsored plan, the deductible amount may be the lesser of 100% of income or the maximum contribution allowed.
HOW MUCH MAY I CONTRIBUTE TO AN IRA?
If you and your spouse are not active participants in an employee-sponsored plan, you may contribute the lesser of 100% of income or the maximum contribution allowed in the corresponding tax year. See the chart below for the maximum contribution allowed during the tax year:
Additionally, if you are age 50 or older for the tax year of the contribution, an additional catch-up amount can be contributed. This catch-up option allows an additional $1,000 to be contributed during the tax year.
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|
|
|---|---|---|
2009 |
$5,000 |
$6,000 |
2010 |
$5,000 |
$6,000 |
If you are married, you may also have the opportunity to make a deductible contribution into an IRA on behalf of your non-working spouse provided that a joint return is filed for the year. Please consult your tax advisor to determine your specific eligibility and deductibility amounts.
WHAT ARE THE RESTRICTIONS ON AN IRA DISTRIBUTION?
You may withdraw IRA funds at any time and income taxes are payable on the entire pre-tax portion (all of the money will be pre-tax provided that there are no non-deductible IRA contributions). A 10% penalty tax may also be imposed if you are under age 591⁄2. Exceptions to this penalty tax (if under 591⁄2) are available. One such exception applies to those situations in which the funds are used by a first time homebuyer (subject to a $10,000 limitation). A second exception applies where an IRA distribution is used for qualified educational expenses. However, these two exceptions do not apply to the ordinary income tax assessed upon the pre-tax portion of the withdrawal. Please consult your tax advisor to determine whether these or other exceptions apply to your specific situation.
Additionally, you must begin taking Required Minimum Distributions (RMDs) at age 701⁄2, which are based on your life expectancy. The required beginning date for an RMD is April 1 of the calendar year following the calendar year in which you attain age 701⁄2.
CAN YOU TRANSFER/ROLLOVER EXISTING RETIREMENT ACCOUNTS TO AN IRA?
Yes, in addition to accepting contributory funds, an IRA also accepts transfers from existing IRAs, SEP IRAs, and SIMPLE IRAs (after the SIMPLE IRA has been in place for two years) as well as rollovers from 401(k), TSA, Governmental 457, Profit Sharing and other retirement plans.