For information regarding different IRAs please see the Tax Tips section of this site.
Below is more IRA information from the IRS:
59015160xIndividual
Retirement
Arrangements
(IRAs)What's New for 20052What's New for 20062Reminders3Introduction41. Traditional IRAs7What Is a Traditional IRA?7Who Can Set Up a Traditional IRA?7When Can a Traditional IRA Be Set Up?8How Can a Traditional IRA Be Set Up?8How Much Can Be Contributed?10When Can Contributions Be Made?11How Much Can You Deduct?11What If You Inherit an IRA?18Can You Move Retirement Plan Assets?19When Can You Withdraw or Use Assets?29When Must You Withdraw Assets? (Required Minimum Distributions)31Are Distributions Taxable?36What Acts Result in Penalties or Additional Taxes?412. Roth IRAs53What Is a Roth IRA?54When Can a Roth IRA Be Set Up?54Can You Contribute to a Roth IRA?54Can You Move Amounts Into a Roth IRA?59Are Distributions Taxable?60Must You Withdraw or Use Assets?633. Savings Incentive Match Plans for Employees (SIMPLE)64What Is a SIMPLE Plan?64How Are Contributions Made?65How Much Can Be Contributed on Your Behalf?65When Can You Withdraw or Use Assets?674. Hurricane-Related Relief67Qualified Hurricane Distributions67Repayment of a Qualified Distribution for the Purchase or Construction of a Main Home695. Retirement Savings Contributions Credit706. How To Get Tax Help71AppendicesAppendix A. Summary Record of Traditional IRA(s) for 2005 and Worksheet for Determining Required Minimum
Distributions75Appendix B. Worksheets for Social Security Recipients Who Contribute to a Traditional IRA77Appendix C. Life Expectancy TablesTable I (Single Life Expectancy)84Table II (Joint Life and Last Survivor Expectancy)86Table III (Uniform Lifetime)100Index101What's New for 2005Hurricane tax relief.
Special rules apply to the use of retirement funds (including IRAs) by qualified individuals who suffered an economic loss as a result of Hurricane
Katrina, Rita, or Wilma. See Hurricane-Related Relief, in Chapter 4 for information on these special rules.
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 were age 50 or older 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.
For more information, see How Much Can Be Contributed? in chapter 1.
Roth IRA contribution limit.
If contributions on your behalf were made only to Roth IRAs, your contribution limit for 2005 will generally be the lesser of:
$4,000, or
Your taxable compensation for the year.
If you were age 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 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? in chapter 2.
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. See
How Much Can You Deduct? in chapter 1.
Increase in limit on salary reduction contributions under a SIMPLE.
For 2005, salary reduction contributions that your employer could make on your behalf under a SIMPLE plan increased to $10,000 (up from $9,000 in
2004).
For more information about salary reduction contributions, see How Much Can Be Contributed on Your Behalf? in chapter 3.
Additional salary reduction contributions to SIMPLE IRAs for persons age 50 and older.
For 2005, additional salary reduction contributions could be made to your SIMPLE IRA if:
You were age 50 or older in 2005, and
No other salary reduction contributions could be made for you to the plan for the year because of limits or restrictions, such as the
regular annual limit.
For 2005, the additional amount is the lesser of the following two amounts.
$2,000 (up from $1,500 for 2004), or
Your compensation for the year reduced by your other elective deferrals for the year.
For more information, see How Much Can Be Contributed on Your Behalf? in chapter 3.
Modified AGI.
Beginning in 2005, the domestic production activities deduction is added back to income when figuring modified AGI. See Modified AGI in
chapter 1.
Modified AGI for conversion purposes.
Beginning in 2005, modified AGI for conversion purposes does not include required distributions from IRAs. For more information, see Modified
AGI in chapter 2.
What's New for 2006Traditional 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 or older 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? in chapter 1.
Roth IRA contribution limit.
If contributions on your behalf are made 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 or older 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? in chapter 2.
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? in chapter 1.
Additional salary reduction contributions to SIMPLE IRAs for persons age 50 and older.
For 2006, additional salary reduction contributions can be made to your SIMPLE IRA if:
You will be age 50 or older before 2007, and
No other salary reduction contributions can be made for you to the plan for the year because of limits or restrictions, such as the regular
annual limit.
For 2006, the additional amount is the lesser of the following two amounts.
$2,500 (up from $2,000 for 2005), or
Your compensation for the year reduced by your other elective deferrals for the year.
For more information, see How Much Can Be Contributed on Your Behalf? in chapter 3.
Qualified Roth contribution programs.
For tax years beginning after 2005, 401(k) and 403(b) plans can create a qualified Roth contribution program so that participants may elect to have
part or all of their elective deferrals to the plan designated as after-tax Roth contributions.
RemindersFiguring net income on returned or recharacterized IRA contributions.Recharacterization:IRA contributions
For figuring the net income on IRA contributions made during 2002 and 2003 that were returned to you or recharacterized, you can use the method
described in this publication, the method permitted by Notice 2000-39, or the method in the proposed regulations.
For more information, see How Do You Recharacterize a Contribution? or Contributions Returned Before Due Date of Return in
chapter 1.
Simplified employee pension (SEP).
SEP-IRAs are not covered in this publication. They are covered in Publication 560, Retirement Plans for Small Business.
Deemed IRAs.Deemed IRAs
A qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee
contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's
account can be treated as a traditional IRA or a Roth IRA.
For this purpose, a qualified employer plan includes:
A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),
A qualified employee annuity plan (section 403(a) plan),
A tax-sheltered annuity plan (section 403(b) plan), and
A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality
of a state or political subdivision of a state.
Statement of required minimum distribution.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 section 403(b) contracts (generally tax-sheltered
annuities) or for IRAs of owners who have died.
IRA interest.Interest on IRA
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 return as tax-exempt interest.
Form 8606.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.Roth IRAs
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. Roth IRAs are discussed in chapter 2.
Photographs of missing children.Missing children, photographs of
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
This publication discusses individual retirement arrangements (IRAs). An IRA is a personal savings plan that gives you tax advantages for setting
aside money for retirement.
What are some tax advantages of an IRA?Tax advantages of IRAs
Two tax advantages of an IRA are that:
Contributions you make to an IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances,
and
Generally, amounts in your IRA (including earnings and gains) are not taxed until distributed. In some cases, amounts are not taxed at all
if distributed according to the rules.
What's in this publication?
This publication discusses traditional, Roth, and SIMPLE IRAs. It explains the rules for:
Setting up an IRA,
Contributing to an IRA,
Transferring money or property to and from an IRA,
Handling an inherited IRA,
Receiving distributions (making withdrawals) from an IRA, and
Taking a credit for contributions to an IRA.
It also explains the penalties and additional taxes that apply when the rules are not followed. To assist you in complying with the tax rules for
IRAs, this publication contains worksheets, sample forms, and tables, which can be found throughout the publication and in the appendices at the back
of the publication.
How to use this publication.
The rules that you must follow depend on which type of IRA you have. Use Table I-1 to help you determine which parts of this publication to read.
Also use Table I-1 if you were referred to this publication from instructions to a form.
<ROM>Table I-1. </ROM><BLD>Using This Publication</BLD>IF you need
information on ...THEN see ...traditional IRAs chapter 1.Roth IRAs chapter 2, and parts of
chapter 1.SIMPLE IRAs chapter 3.hurricane-related relief chapter 4.the credit for qualified retirement savings contributions chapter 5.how to keep a record of your contributions to, and distributions from, your traditional IRA(s) appendix A.SEP-IRAs and 401(k) plans Publication 560.Coverdell education savings accounts (formerly called education IRAs) Publication 970.IF for 2005, you
received social security benefits,
had taxable compensation,
contributed to a traditional IRA, and
you or your spouse was covered by an employer retirement plan,
and you want to...THEN see ...first figure your modified adjusted gross income (AGI) appendix B worksheet 1.then figure how much of your traditional IRA contribution you can deduct appendix B worksheet 2.and finally figure how much of your social security is taxable appendix B worksheet 3.
Tables:Using this publication (Table I-1)
Comments and suggestions.Comments on publicationSuggestions for publication
We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:
Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6406
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in
your correspondence.
You can email us at
*taxforms@irs.gov. (The asterisk must be included in the
address.) Please put Publications Comment on the subject line. Although we cannot respond individually to each email, we do appreciate your
feedback and will consider your comments as we revise our tax products.
Tax questions.
If you have a tax question, visit
www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either
of the addresses listed above.
Ordering forms and publications.
Visit
www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the
address shown under How To Get Tax Help in the back of this publication.
Publications560Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)571Tax-Sheltered Annuity Plans (403(b) Plans)575Pension and Annuity Income939General Rule for Pensions and AnnuitiesForms (and instructions)Withholding Certificate for Pension or Annuity PaymentsDistributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial InstitutionSIMPLE Individual Retirement Trust AccountSIMPLE Individual Retirement Custodial AccountSavings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial InstitutionAdditional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored AccountsIRA Contribution InformationNondeductible IRAsExclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989Qualified Adoption ExpensesCredit for Qualified Retirement Savings Contributions
See chapter 6 for information about getting these publications and forms.
<ROM>Table I-2. </ROM>How Are a Traditional IRA and a Roth IRA Different?
<L><ROM>This table shows the differences between traditional and Roth IRAs. Answers in the middle column apply to traditional IRAs. Answers in the
right column apply to Roth IRAs.</ROM>QuestionAnswerTraditional IRA?Roth IRA?Is there an age limit on when I can set up and contribute to aYes. You must not have reached age 70 by the end of the year. See Who Can Set Up a Traditional IRA?
in chapter 1.No. You can be any age. See Can You Contribute to a Roth IRA? in chapter 2.If I earned more than $4,000 in 2005 ($4,500 if I was 50 or older by the end of 2005), is there a limit on how much I
can contribute to aYes. For 2005, you can contribute to a traditional IRA up to:
$4,000, or
$4,500 if you were age 50 or older by the end of 2005.
There is no upper limit on how much you can earn and still contribute. See How Much Can Be Contributed? in chapter 1. Yes. For 2005, you may be able to contribute to a Roth IRA up to:
$4,000, or
$4,500 if you were age 50 or older by the end of 2005,
but the amount you can contribute may be less than that depending on your income, filing status, and if you contribute to another IRA. See How
Much Can Be Contributed? and Table 2-1 in chapter 2.Can I deduct contributions to aYes. You may be able to deduct your contributions to a traditional IRA depending on your income, filing status, whether you are
covered by a retirement plan at work, and whether you receive social security benefits. See How Much Can You Deduct? in chapter 1.No. You can never deduct contributions to a Roth IRA. See What is a Roth IRA? in chapter 2.Do I have to file a form just because I contribute to aNot unless you make nondeductible contributions to your traditional IRA. In that case, you must file Form 8606. See
Nondeductible Contributions in chapter 1.No. You do not have to file a form if you contribute to a Roth IRA. See Introduction in chapter 2.Do I have to start taking distributions when I reach a certain age from aYes. You must begin receiving required minimum distributions by April 1 of the year following the year you reach age 70. See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1.No. If you are the owner of a Roth IRA, you do not have to take distributions regardless of your age. See Are
Distributions Taxable? in chapter 2.How are distributions taxed from aDistributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible contributions, not all of the
distribution is taxable. See Are Distributions Taxable? in chapter 1.Distributions from a Roth IRA are not taxed as long as you meet certain criteria. See Are Distributions Taxable? in
chapter 2. Do I have to file a form just because I receive distributions from aNot unless you have ever made a nondeductible contribution to a traditional IRA. If you have, file Form 8606.Yes. File Form 8606 if you received distributions from a Roth IRA (other than a rollover, recharacterization, certain
qualified distributions, or a return of certain contributions).
Roth IRAs:Compared to traditional IRA (Table I-2)Tables:Traditional IRA compared to Roth IRA (Table I-2)Traditional IRAs:Compared to Roth IRA (Table I-2)
Traditional IRAsTraditional IRAsWhat's New for 2005Hurricane relief.
If you were affected by Hurricane Katrina, Rita, or Wilma, see chapter 4, Hurricane-Related Relief.
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 were age 50 or older 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.
For more information, see How Much Can Be Contributed? in this chapter.
Modified AGI limit for traditional IRA contributions increased.
For 2005, if you are 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. See
How Much Can You Deduct? in this chapter.
What's New for 2006Traditional 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 or older 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? in this chapter.
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? in this chapter.
This chapter discusses the original IRA. In this publication the original IRA (sometimes called an ordinary or regular IRA) is referred to as a
traditional IRA. The following are two advantages of a traditional IRA:
You may be able to deduct some or all of your contributions to it, depending on your circumstances.
Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed.
What Is a Traditional IRA?Traditional IRAs:Defined
A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.
Who Can Set Up
a Traditional IRA?Traditional IRAs:Setting up
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.
You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your
contributions if you or your spouse is covered by an employer retirement plan. See How Much Can You Deduct, later.
Both spouses have compensation.
If both you and your spouse have compensation and are under age 70, each of you can set up an IRA. You cannot both participate in
the same IRA.
What Is Compensation?Compensation:Defined
Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation
includes the items discussed next.
Wages, salaries, etc.Compensation:Wages, salaries, etc.
Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. 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 IRA purposes only if
shown in box 1 of Form W-2.
Commissions.
An amount you receive that is a percentage of profits or sales price is compensation.
Self-employment income.Self-employed persons:Income of
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.
When you have both self-employment income and salaries and wages, your compensation includes both amounts.
Self-employment loss.Compensation:Self-employment
If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
Alimony and separate maintenance.Alimony
For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate
maintenance.
<ROM>Table 1-1. </ROM>
<IMARK><BLD>Compensation for Purposes
<L>of an IRA</BLD>Includes ...Does not include ... earnings and profits from
property.wages, salaries, etc. interest and
dividend income.commissions. pension or annuity
income.self-employment income. deferred compensation.alimony and separate maintenance. income from certain
partnerships. any amounts you exclude
from income.
Compensation:Income included (Table 1-1)Tables:Compensation, types of (Table 1-1)
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 Can a Traditional IRA
Be Set Up?Individual retirement arrangements (IRAs):When to 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.
How Can a Traditional IRA
Be Set Up?Individual retirement arrangements (IRAs):How to set upHow to:Set up an IRA
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. The
requirements for the various arrangements are discussed below.
Kinds of traditional IRAs.Traditional IRAs:Types of
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.
An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your
beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.
The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS
to act as trustee or custodian.
The trustee or custodian generally cannot accept contributions of more than $4,000 ($4,500 if you are age 50 or older). However, rollover
contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
Contributions, except for rollover contributions, must be in cash. See Rollovers, later.
You must have a nonforfeitable right to the amount at all times.
Money in your account cannot be used to buy a life insurance policy.
Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
You must start receiving distributions by April 1 of the year following the year in which you reach age 70. See When
Must You Withdraw Assets? (Required Minimum Distributions), later.
You can set up an individual retirement annuity by purchasing an annuity contract or an endowment contract from a life insurance company.
An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones
who can receive the benefits or payments.
An individual retirement annuity must meet all the following requirements.
Your entire interest in the contract must be nonforfeitable.
The contract must provide that you cannot transfer any portion of it to any person other than the issuer.
There must be flexible premiums so that if your compensation changes, your payment can also change. This provision applies to contracts
issued after November 6, 1978.
The contract must provide that contributions cannot be more than $4,000 ($4,500 if you are age 50 or older), and that you must use any
refunded premiums to pay for future premiums or to buy more benefits before the end of the calendar year after the year in which you receive the
refund. For 2006, contributions cannot be more than $4,000 ($5,000 if you are age 50 or older).
Distributions must begin by April 1 of the year following the year in which you reach age 70. See When Must You
Withdraw Assets? (Required Minimum Distributions), later.
The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982. The bonds have the following features.
They stop earning interest when you reach age 70. If you die, interest will stop 5 years after your death, or on the date
you would have reached age 70, whichever is earlier.
You cannot transfer the bonds.
If you cash (redeem) the bonds before the year in which you reach age 59, you may be subject to a 10% additional tax. See
Age 59 Rule under Early Distributions, later. You can roll over redemption proceeds into IRAs.
A simplified employee pension (SEP) is a written arrangement that allows your employer to make deductible contributions to a traditional IRA (a
SEP-IRA) set up for you to receive such contributions. Generally, distributions from SEP IRAs are subject to the withdrawal and tax rules that apply
to traditional IRAs. See Publication 560 for more information about SEPs.
Employer and Employee
Association Trust AccountsEmployer and employee association trust accounts
Your employer or your labor union or other employee association can set up a trust to provide individual retirement accounts for employees or
members. The requirements for individual retirement accounts apply to these traditional IRAs.
Required DisclosuresTraditional IRAs:Disclosures
The trustee or issuer (sometimes called the sponsor) of your traditional IRA generally must give you a disclosure statement at least 7 days before
you set up your IRA. However, the sponsor does not have to give you the statement until the date you set up (or purchase, if earlier) your IRA,
provided you are given at least 7 days from that date to revoke the IRA.
The disclosure statement must explain certain items in plain language. For example, the statement should explain when and how you can revoke the
IRA, and include the name, address, and telephone number of the person to receive the notice of cancellation. This explanation must appear at the
beginning of the disclosure statement.
Traditional IRAs:Setting up
If you revoke your IRA within the revocation period, the sponsor must return to you the entire amount you paid. The sponsor must report on the
appropriate IRS forms both your contribution to the IRA (unless it was made by a trustee-to-trustee transfer) and the amount returned to you. These
requirements apply to all sponsors.
How Much Can Be Contributed?Contributions:Traditional IRAsTraditional IRAs:Contribution limitsTraditional IRAs:Contributions
There are limits and other rules that affect the amount that can be contributed to a traditional IRA. These limits and rules are explained below.
Community property laws.Community property
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.Broker's commissions
Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. For information about whether you can
deduct brokers' commissions, see Brokers' commissions, later under How Much Can You Deduct.
Trustees' fees.Trustees' fees
Trustees' administrative fees are not subject to the contribution limit. For information about whether you can deduct trustees' fees, see
Trustees' fees, later under How Much Can You Deduct.
Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. See chapter 2 for information about Roth IRAs.
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 age 50 or older; for 2006, $4,000 or $5,000, if you are age 50 or older), or
Age 50:Contributions
Your taxable compensation (defined earlier) for the year.
Note.
This limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded
entirely by employee contributions).
Section 501(c)(18) plan
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.)
Examples.
George, who is 34 years old and single, earns $24,000 in 2005. His IRA contributions for 2005 are limited to $4,000.
Danny, an unmarried college student working part time, earns $3,500 in 2005. His IRA contributions for 2005 are limited to $3,500, the amount of
his compensation.
More than one IRA.More than one IRAContribution limits:More than one IRA
If you have more than one IRA, the limit applies to the total contributions made on your behalf to all your traditional IRAs for the year.
Annuity or endowment contracts.Annuity contractsEndowment contractsAnnuity contracts
If you invest in an annuity or endowment contract under an individual retirement annuity, no more than $4,000 ($4,500 if you are age 50 or older;
for 2006, $4,000 or $5,000, if you are age 50 or older) can be contributed toward its cost for the tax year, including the cost of life insurance
coverage. If more than this amount is contributed, the annuity or endowment contract is disqualified.
Spousal IRA LimitSpousal IRAs:Contribution limits
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 two amounts:
$4,000 ($4,500 if you are age 50 or older; for 2006, $4,000 or $5,000, if you are age 50 or older), or
The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.
Your spouse's IRA contribution for the year to a traditional IRA.
Any contributions 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 age 50 or older or $9,000 if both of you are age 50 or older). For 2006, combined total contributions can be as much as $8,000
($9,000 if only one of you is age 50 or older or $10,000 if both of you are age 50 or older).
Note.Section 501(c)(18) plan
This traditional IRA limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959,
that is funded entirely by employee contributions).
Example.
Kristin, a full-time student with no taxable compensation, marries Carl during the year. Neither was age 50 by the end of 2005. For the year, Carl
has taxable compensation of $30,000. He plans to contribute (and deduct) $4,000 to a traditional IRA. If he and Kristin file a joint return, each can
contribute $4,000 to a traditional IRA. This is because Kristin, who has no compensation, can add Carl's compensation, reduced by the amount of his
IRA contribution, ($30,000 – $4,000 = $26,000) to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her
case, $4,000 is her contribution limit, because $4,000 is less than $26,000 (her compensation for purposes of figuring her contribution limit).
Filing StatusFiling status
Generally, except as discussed earlier under Spousal IRA Limit, your filing status has no effect on the amount of allowable
contributions to your traditional IRA. However, if during the year either you or your spouse was covered by a retirement plan at work, your deduction
may be reduced or eliminated, depending on your filing status and income. See How Much Can You Deduct, later.
Example.
Tom and Darcy are married and both are 53. They both work and each has a traditional IRA. Tom earned $3,800 and Darcy earned $48,000 in 2005.
Because of the spousal IRA limit rule, even though Tom earned less than $4,500, they can contribute up to $4,500 to his IRA for 2005 if they file a
joint return. They can contribute up to $4,500 to Darcy's IRA. If they file separate returns, the amount that can be contributed to Tom's IRA is
limited to $3,800.
Less Than Maximum ContributionsContributions:Less than maximum
If contributions to your traditional IRA for a year were less than the limit, you cannot contribute more after the due date of your return for that
year to make up the difference.
Example.
Rafael, who is 40, earns $30,000 in 2005. Although he can contribute up to $4,000 for 2005, he contributes only $2,000. After April 17, 2006,
Rafael cannot make up the difference between his actual contributions for 2005 ($2,000) and his 2005 limit ($4,000). He cannot contribute $2,000 more
than the limit for any later year.
More Than Maximum ContributionsContributions:Traditional IRAsTraditional IRAs:Contribution limitsTraditional IRAs:Contributions
If contributions to your 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. However, a penalty or additional tax may apply. See Excess
Contributions, later under What Acts Result in Penalties or Additional Taxes.
When Can Contributions
Be Made?Contributions:When to contributeAge limit:Traditional IRA
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. However, you may be able to transfer or roll
over certain property from one retirement plan to another. See the discussion of rollovers and other transfers later in this chapter under Can
You Move Retirement Plan Assets.
Contributions can be made to your traditional IRA for each year that you receive compensation and have not reached age 70. For any
year in which you do not work, contributions cannot be made to your IRA unless you receive alimony or file a joint return with a spouse who has
compensation. See Who Can Set Up a Traditional IRA, earlier. Even if contributions cannot be made for the current year, the amounts
contributed for years in which you did qualify can remain in your IRA. Contributions can resume for any years that you qualify.
Contributions must be made by due date.Traditional IRAs:Contributions: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.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.Contributions:Designating the year
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.Filing before IRA 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.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?Deductions:Traditional IRAsTraditional IRAs:Deductions
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 applicable) explained earlier under How Much Can Be Contributed.
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.
You may be able to claim a credit for contributions to your traditional IRA. For more information, see chapter 5.
Trustees' fees.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). For information about miscellaneous itemized
deductions, see Publication 529, Miscellaneous Deductions.
Brokers' commissions.Broker's commissions
These 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 of your traditional IRAs of up to the lesser of:
$4,000 ($4,500 if you are age 50 or older; for 2006, $4,000 or $5,000, if you are age 50 or older), or
100% of your compensation.
This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf.
Spousal IRA.Spousal IRAs:Deduction
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:
$4,000 ($4,500 if the spouse with the lower compensation is age 50 or older; for 2006, $4,000 or $5,000, if that spouse is age 50 or older),
or
The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts.
The IRA deduction for the year of the spouse with the greater compensation.
Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation.
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 section 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 the contributions to your own IRA. Your deductions are subject to the rules for single
individuals.
Covered by an employer retirement plan.Employer plans:Covered by
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.
Are You Covered
by an Employer Plan?Employer retirement plans
Form W-2:Employer retirement plansThe 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.Federal judges
For purposes of the IRA deduction, federal judges are covered by an employer plan.
For Which Year(s) Are You Covered?Employer plans:Year(s) 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.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.Defined contribution plansEmployer retirement plans:Defined contribution plans
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. However, also see Situations in Which You Are Not Covered, later.
A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. In a defined contribution plan, the
amount to be contributed to each participant's account is spelled out in the plan. The level of benefits actually provided to a participant depends on
the total amount contributed to that participant's account and any earnings on those contributions. Types of defined contribution plans include
profit-sharing plans, stock bonus plans, and money purchase pension plans.
Example 1.
Company A has a money purchase pension plan. Its plan year is from July 1 to June 30. The plan provides that contributions must be allocated as of
June 30. Bob, an employee, leaves Company A on December 31, 2004. The contribution for the plan year ending on June 30, 2005, is made February 15,
2006. Because an amount is contributed to Bob's account for the plan year, Bob is covered by the plan for his 2005 tax year.
Example 2.
Mickey was covered by a profit-sharing plan and left the company on December 31, 2004. The plan year runs from July 1 to June 30. Under the terms
of the plan, employer contributions do not have to be made, but if they are made, they are contributed to the plan before the due date for filing the
company's tax return. Such contributions are allocated as of the last day of the plan year, and allocations are made to the accounts of individuals
who have any service during the plan year. As of June 30, 2005, no contributions were made that were allocated to the June 30, 2005, plan year, and no
forfeitures had been allocated within the plan year. In addition, as of that date, the company was not obligated to make a contribution for such plan
year and it was impossible to determine whether or not a contribution would be made for the plan year. On December 31, 2005, the company decided to
contribute to the plan for the plan year ending June 30, 2005. That contribution was made on February 15, 2006. Because an amount was allocated to
Mickey's account as of June 30, 2005, Mickey is an active participant in the plan for his 2006 tax year but not for his 2005 tax year.
No vested interest.
If an amount is allocated to your account for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the
account.
Defined benefit plan.Defined benefit plansEmployer retirement plans:Defined benefit plans
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. In a defined benefit plan, the level of benefits to be provided to each
participant is spelled out in the plan. The plan administrator figures the amount needed to provide those benefits and those amounts are contributed
to the plan. Defined benefit plans include pension plans and annuity plans.
Example.
Nick, an employee of Company B, is eligible to participate in Company B's defined benefit plan, which has a July 1 to June 30 plan year. Nick
leaves Company B on December 31, 2004. Because Nick is eligible to participate in the plan for its year ending June 30, 2005, he is covered by the
plan for his 2005 tax year.
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 by 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 previous employer's plan.
If you receive retirement benefits from a previous employer's plan, you are not covered by that plan.
Reservists.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.
The plan you participate in is established for its employees by:
The United States,
A state or political subdivision of a state, or
An instrumentality of either (a) or (b) above.
You did not serve more than 90 days on active duty during the year (not counting duty for training).
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.
The plan you participate in is established for its employees by:
The United States,
A state or political subdivision of a state, or
An instrumentality of either (a) or (b) above.
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 PlanEmployer retirement plans:Limit if covered by
As discussed earlier, the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered
for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and by your filing status. Your
deduction may also be affected by social security benefits you received.
Reduced or no deduction.
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 the phaseout, you must determine your modified adjusted gross income (AGI) and your filing status, as
explained later under Deduction Phaseout. Once you have determined your modified AGI and your filing status, you can use Table 1-2 or Table
1-3 to determine if the phaseout applies.
Social Security RecipientsSocial Security recipientsTraditional IRAs:Social Security recipients
Instead of using Table 1-2 or Table 1-3 and Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2004, later, complete the worksheets in Appendix
B of this publication 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 the worksheets in Appendix B to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social
security benefits. Appendix B includes an example with filled-in worksheets to assist you.
<ROM>Table 1-2.</ROM> <BLD>Effect of Modified AGI
<SUP>1</SUP> on Deduction If You Are Covered by a Retirement Plan at Work</BLD>
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 adjusted gross income (modified AGI)
is ...THEN you can take ...single or
head of household $50,000 or lessa full deduction.more than $50,000
but less than $60,000a partial deduction.$60,000 or moreno deduction.married filing jointly or
qualifying widow(er) $70,000 or lessa full deduction.more than $70,000
but less than $80,000a partial deduction.$80,000 or moreno deduction.married filing separately
2less than $10,000a partial deduction.$10,000 or moreno deduction.
1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later.
2 If 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 filing status).
Employer retirement plans:Effect of modified AGI on deduction (Table 1-2)Modified adjusted gross income (AGI):Employer retirement plan coverage and deduction (Table 1-2)Tables:Modified AGI:Employer retirement plan coverage and deduction (Table 1-2)
<ROM>Table 1-3.</ROM> <BLD>Effect of Modified AGI
<SUP>1</SUP> on Deduction If You Are NOT Covered by a Retirement Plan at Work</BLD>
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 adjusted gross income (modified AGI) is ...THEN you can take ...single,head of household, or
qualifying widow(er)any amounta full deduction.married filing jointly or separately with a spouse who is not covered by a plan
at workany amounta full deduction.married filing jointly with a spouse who is covered by a plan
at work$150,000 or lessa full deduction.more than $150,000
but less than $160,000a partial deduction.$160,000 or moreno deduction.married filing separately with a spouse who is covered by a plan
at work
2less than $10,000a partial deduction.$10,000 or moreno deduction.
1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later.
2 You are entitled to the full deduction if you did not live with your spouse at any time during the year.
Modified adjusted gross income (AGI):No employer retirement plan coverage and deduction (Table 1-3)Tables:Modified AGI:No employer retirement plan coverage and deduction (Table 1-3)Deduction PhaseoutDeductions:PhaseoutPhaseout of deduction
The amount of any reduction in the limit on your IRA deduction (phaseout) depends on whether you or your spouse was covered by an employer
retirement plan.
Covered by a retirement plan.
If you are 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 1-2.
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 1-3.
Filing status.Filing status:Deduction phaseout and
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
Publication 501, Exemptions, Standard Deduction, and Filing Information.
Lived apart from spouse.Separated taxpayers:Filing status of
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).Adjusted gross income (AGI):Modified adjusted gross income (AGI)Modified adjusted gross income (AGI):Figuring (Worksheet 1-1)
You can use Worksheet 1-1 to figure your modified AGI. If you made contributions to your IRA for 2005 and received a distribution from your IRA in
2005, see Both contributions for 2005 and distributions in 2005, later.
Do not assume that your modified AGI is the same as your compensation. Your modified AGI may include income in addition to your compensation such
as interest, dividends, and income from IRA distributions.
Form 1040.Form 1040:Modified AGI calculation from
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 employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
Form 1040A.Form 1040A:Modified AGI calculation from
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 bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
Income from IRA distributions.Distributions:Income from
If you received distributions in 2005 from one or more traditional IRAs and your traditional IRAs include only deductible contributions, the
distributions are fully taxable and are included in your modified AGI.
Both contributions for 2005 and distributions in 2005.Contributions:Distributions in same year asDistributions:Contributions in same year as
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, and
Some of those contributions may be nondeductible contributions. (See Nondeductible Contributions and Worksheet 1-2,
later.)
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.
If at least one of the above does not apply, figure your modified AGI using Worksheet 1-1.
How To Figure Your Reduced IRA DeductionDeductions:Figuring reduced IRA deduction
If you or your spouse is covered by an employer retirement plan and you did not receive any social security benefits, you can figure your reduced
IRA deduction by using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2005. The instructions for both Form 1040 and Form 1040A include similar
worksheets that you can use instead of the worksheet in this publication.
If you or your spouse is covered by an employer retirement plan, and you received any social security benefits, see Social Security
Recipients, earlier.
Note.
If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.
<ROM>Worksheet 1-1. </ROM>Figuring Your Modified AGI
<L><ITL>Use this worksheet to figure your modified AGI for traditional IRA purposes.</ITL>
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 10401.2.Enter any student loan interest deduction from line 18, Form 1040A, or line 33, Form 10402.3.Enter any tuition and fees deduction from line 19, Form 1040A, or line 34, Form 10403.4.Enter any domestic production activities deduction from line 35, Form 10404.5.Enter any foreign earned income exclusion and/or housing exclusion from line 18, Form 2555-EZ, or line 43,
Form 25554.6.Enter any foreign housing deduction from line 48, Form 25555.7.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)6.8.Enter any exclusion of employer-provided adoption benefits shown on line 30, Form 88397.9.Add lines 1 through 8. This is your Modified AGI for traditional IRA purposes8.
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 of that form.
You cannot deduct IRA contributions on Form 1040EZ.
If you are self-employed (a sole proprietor or partner) and have a SIMPLE IRA, enter your deduction for allowable plan contributions on Form 1040,
line 28.
Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA of 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.
Tony is 29 years old and single. In 2005, he was covered by a retirement plan at work. His salary is $57,312. His modified adjusted gross income
(modified AGI) is $65,000. Tony makes a $4,000 IRA contribution for 2005. Because he was covered by a retirement plan and his modified AGI is above
$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.
Form 8606.Form 8606
To designate contributions as nondeductible, you must file Form 8606. (See the filled-in Forms 8606 in this chapter.)
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 contributions.
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.Nondeductible contributions:Failure to report
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.Nondeductible contributions:Overstatement penaltyPenalties:Overstatement of nondeductible contributions
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.Form 8606:Failure to file, penaltyPenalties: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.
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.
Commonly, distributions from your traditional IRAs will include both taxable and nontaxable (cost basis) amounts. See Are Distributions
Taxable, later, for more information.
Recordkeeping. There is a recordkeeping worksheet, Appendix A, Summary Record of Traditional IRA(s) for 2005, that you can
use to keep a record of deductible and nondeductible IRA contributions.
Examples — Worksheet for
Reduced IRA Deduction for 2005Traditional IRAs:Reduced IRA deduction for 2005 (Worksheet 1-2)Worksheets:Figuring reduced IRA deduction for 2005 (Worksheet 1-2)
The following examples illustrate the use of Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2005.
Example 1.
For 2005, Tom and Betty file a joint return on Form 1040. They are both 39 years old. They are both employed and Tom is covered by his employer's
retirement plan. Tom's salary is $47,000 and Betty's is $26,555. They each have a traditional IRA and their combined modified AGI, which includes
$2,000 interest and dividend income, is $75,555. Because their modified AGI is between $70,000 and $80,000 and Tom is covered by an employer plan, Tom
is subject to the deduction phaseout discussed earlier under Limit If Covered By Employer Plan.
For 2005, Tom contributed $4,000 to his IRA and Betty contributed $4,000 to hers. Even though they file a joint return, they must use separate
worksheets to figure the IRA deduction for each of them.
Tom can take a deduction of only $1,780.
He can choose to treat the $1,780 as either deductible or nondeductible contributions. He can either leave the $2,220 ($4,000 − $1,780) of
nondeductible contributions in his IRA or withdraw them by April 17, 2006. He decides to treat the $1,780 as deductible contributions and leave the
$2,220 of nondeductible contributions in his IRA.
Using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2005, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2,
Figuring Your Reduced IRA Deduction for 2005–Example 1 Illustrated.
Betty figures her IRA deduction as follows. Betty can treat all or part of her contributions as either deductible or nondeductible. This is because
her $4,000 contribution for 2005 is not subject to the deduction phaseout discussed earlier under Limit If Covered By Employer Plan. She
does not need to use Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2005, because their modified AGI is not within the phaseout range that
applies. Betty decides to treat her $4,000 IRA contributions as deductible.
The IRA deductions of $1,780 and $4,000 on the joint return for Tom and Betty total $5,780.
Example 2.
For 2005, Ed and Sue file a joint return on Form 1040. They are both 39 years old. Ed is covered by his employer's retirement plan. Ed's salary is
$40,000. Sue had no compensation for the year and did not contribute to an IRA. Ed contributed $4,000 to his traditional IRA and $4,000 to a
traditional IRA for Sue (a spousal IRA). Their combined modified AGI, which includes $2,000 interest and dividend income and a large capital gain from
the sale of stock, is $156,555.
Because the combined modified AGI is $80,000 or more, Ed cannot deduct any of the contribution to his traditional IRA. He can either leave the
$4,000 of nondeductible contributions in his IRA or withdraw them by April 17, 2006.
Sue figures her IRA deduction as shown on Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2005—Example 2 Illustrated.
<ROM>Worksheet 1-2. </ROM>Figuring Your Reduced IRA Deduction for 2005
<L>
<L><ROM>(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your
coverage situation and filing status.)</ROM>
<L>
<L><BIT>Note.</BIT> <ITL>If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction
separately.</ITL>Deductions:Traditional IRAsTraditional IRAs:DeductionsIF you ...AND your
filing status is ...AND your
modified
AGI is over ...THEN enter
on line 1
below ...are covered by an employer plan single or head of household$50,000$60,000married filing jointly or qualifying widow(er)$70,000$80,000married filing separately$0$10,000are not covered by an employer plan, but your spouse is
coveredmarried filing jointly$150,000$160,000married filing separately$0$10,0001.Enter applicable amount from table above1.2.Enter your modified AGI (that of both spouses, if married filing jointly)
2.Note. If line 2 is equal to or more than the amount on line 1, stop
here.Your IRA contributions are not deductible. See Nondeductible Contributions.3.Subtract line 2 from line 1. If line 3 is $10,000 or more, stop here. You can
take a full IRA deduction for contributions of up to $4,000 ($4,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your
spouse's) compensation, whichever is less 3.4.Multiply line 3 by 40% (.40) (by 45% (.45) if you are age 50 or older). If the result is
not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than
$200, enter $200 4.5.Enter your compensation minus any deductions on Form 1040, line 27 (one-half of
self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than
your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form
1040, do not reduce your compensation by any losses from self-employment 5.6.Enter contributions made, or to be made, to your IRA for 2005 but do not enter
more than $4,000 ($4,500 if you are age 50 or older). If contributions are more than $4,000 ($4,500 if you are age 50 or older), see Excess
Contributions, later. 6.7.IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a
smaller amount if you choose) here and on the Form 1040 or 1040A line for your IRA, whichever applies. If line 6 is more than line 7 and you want to
make a nondeductible contribution, go to line 8 7.8.Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is
smaller.
Enter the result here and on line 1 of your Form 8606 8.
Traditional IRAs:Reduced IRA deduction for 2005 (Worksheet 1-2)Worksheets:Figuring reduced IRA deduction for 2005 (Worksheet 1-2)
What If You Inherit an IRA?DistributionsInherited IRAsInherited IRAsInherited IRAsTraditional IRAs: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.Spousal IRAs:Inherited
If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:
Treat it as your own IRA by designating yourself as the account owner.
Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:
Qualified employer plan,
Qualified employee annuity plan (section 403(a) plan),
Tax-sheltered annuity plan (section 403(b) plan),
Deferred compensation plan of a state or local government (section 457 plan), or
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. For
more information, see When Must You Withdraw Assets? (Required Minimum Distributions), later.
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.
Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving
distributions from the IRA under the rules for distributions that apply to beneficiaries.
IRA with basis.Basis:Inherited IRAs
If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA.
Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own
traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and
your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.
Federal estate tax deduction.Estate tax:Deduction for inherited IRAs
A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. The beneficiary can
deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year
the income is reported. For information on claiming this deduction, see Estate Tax Deduction under Other Tax Information in
Publication 559, Survivors, Executors, and Administrators.
Any taxable part of a distribution that is not income in respect of a decedent is a payment the beneficiary must include in income. However, the
beneficiary cannot take any estate tax deduction for this part.
A surviving spouse can roll over the distribution to another traditional IRA and avoid including it in income for the year received.
More information.
For more information about rollovers, required distributions, and inherited IRAs, see:
Rollovers, later under Can You Move Retirement Plan Assets?,
When Must You Withdraw Assets? (Required Minimum Distributions), later, and
The discussion of IRA beneficiaries later under When Must You Withdraw Assets? (Required Minimum Distributions).
Inherited IRAsTraditional IRAs:Inherited IRAs
Can You Move Retirement
Plan Assets?Traditional IRAs:TransfersTransfers
You can transfer, tax free, assets (money or property) from other retirement programs (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.
This chapter discusses all three kinds of transfers.
Transfers to Roth IRAs.Transfers:To Roth IRAs
Under certain conditions, you can move assets from a traditional IRA to a Roth IRA. For more information about these transfers, see Converting
From Any Traditional IRA Into a Roth IRA, later, and Can You Move Amounts Into a Roth IRA? in chapter 2.
Trustee-to-Trustee TransferTransfers:Trustee to trusteeTrustee-to-trustee transfers
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. This waiting period is discussed later under Rollover From One IRA Into Another.
For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option, later.
Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute 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.Rollovers:To 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 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 Reporting rollovers from employer plans.
Rollover notice.Notice:RolloversRollovers:Notice
A written explanation of rollover treatment must be given to you by the plan (other than an IRA) making the distribution.
Kinds of rollovers from a traditional IRA.Rollovers:From 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.
Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA.Rollovers:Tax treatment of rollover from traditional IRA to eligible retirement plan other than an IRA
If you roll over a distribution from an IRA into an eligible retirement plan (defined next) other than an IRA, the part of the distribution you
roll over is considered to come from amounts other than after-tax contributions in your traditional IRAs. This means that you can roll over a
distribution from an IRA with nontaxable income into a qualified plan if you have enough taxable income in your IRAs to cover the nontaxable part. The
effect of this is to make the amount in your traditional IRAs that you can roll over to a qualified plan as large as possible.
Eligible retirement plans.
The following are considered eligible retirement plans.
Individual retirement arrangements (IRAs).
Qualified trusts.
Qualified employee annuity plans under section 403(a).
Deferred compensation plans of state and local governments (section 457 plans).
<ROM>Worksheet 1-2. </ROM>Figuring Your Reduced IRA Deduction for 2005—Example 1 Illustrated
<L>
<L><ROM>(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your
coverage situation and filing status.)</ROM>
<L>
<L><BIT>Note.</BIT> <ITL>If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction
separately.</ITL>IF you ...AND your
filing status is ...AND your
modified AGI
is over ...THEN enter on
line 1 below ...are covered by an employer plan single or head of household$50,000$60,000married filing jointly or qualifying widow(er)$70,000$80,000married filing separately$0$10,000are not covered by an employer plan, but your spouse is
coveredmarried filing jointly$150,000$160,000married filing separately$0$10,0001.Enter applicable amount from table above1.80,0002.Enter your modified AGI (that of both spouses, if married filing jointly)
2.75,555Note. If line 2 is equal to or more than the amount on line 1, stop
here.Your IRA contributions are not deductible. See Nondeductible Contributions.3.Subtract line 2 from line 1. If line 3 is $10,000 or more, stop here. You can
take a full IRA deduction for contributions of up to $4,000 ($4,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your
spouse's) compensation, whichever is less 3.4,4454.
