If you are under age 70½ for the entire tax year and have compensation, you are eligible to establish an IRA, even if you already participate in any type of government plan, tax-sheltered annuity, simplified employee pension (SEP) plan, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), or qualified plan (pension or profit sharing) established by an employer.
Compensation is the salary or wages you receive as an employee. If you are self-employed, compensation is your net income for personal services performed for the business. All taxable alimony is considered compensation. Interest, dividends, and most rental income is passive income and is not considered compensation.
You may contribute any amount up to 100 percent of your compensation or $5000, whichever is less, to a a traditional IRA (or to both a traditional and a Roth IRA).
All earnings on your IRA contributions (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the account.
Deductibility of your contribution is based on whether or not you or your spouse are an active participant in an employer-maintained retirement plan. If you are single and not an active participant, you are eligible for a full $5,000 deduction no matter how large your income. If you are not an active participant but your spouse is, you are still eligible for a full deduction if you file jointly and your combined modified adjusted gross income (MAGI) is below $150,000 or a partial deduction if you joint MAGI is between $150,000 and $160,000. If you are an active participant, the deductible amount is dependent on your MAGI and income tax-filing status. You may be eligible for the maximum deduction, a partial deduction, or no deduction.
You can still make nondeductible contributions to your IRA. You may also be eligible for a Roth IRA.
You can withdraw funds from your IRA without the 10 percent IRS premature-distribution penalty any time after you reach age 59½. You can also avoid the premature-distribution penalty before age 59½ if you become disabled or die, if the distributions are part of certain periodic payments, for medical expenses in excess of 7.5% of your adjusted gross income, for health care insurance of you've been receiving unemployment compensation for at least 12 weeks, for qualified higher education expenses, or for a first-time home purchase. When you reach age 70½, you must begin to take your minimum required distributions or severe penalties will be imposed.
If you are over age 59½, simply include the taxable portion of the amount withdrawn (generally, deductible contributions and all earnings) as income. However, if you are under age 59½ and do not meet one of the exceptions, you must also pay a 10% IRS penalty for premature distribution. The nondeductible portion of the distribution is not taxable when withdrawn nor is it subject to the 10% premature-distribution penalty.
Your named beneficiary(ies) will receive the entire proceeds of the IRA. You beneficiary(ies) will not be subject to the IRS 10% premature-distribution penalty. The manner in which your beneficiary(ies) receives the funds is determined by the election made by you or you beneficiary(ies) within the guidelines of the law.
The spousal IRA rules allow a married person to make an IRA contribution for his/her spouse. A couple can contribute up to 100% of their combined earned incomes or $10,000, whichever is less. The amounts can be divided in any manner between the two IRA's, as long as no more that $5,000 is contributed to either IRA.
How Do I Move Funds From One IRA to Another?
There are two methods you can use to move funds from one IRA to another: rollover and transfer. For a rollover, you have 60 calendar days from the date of receipt to roll over the distribution to another IRA. Rollovers from IRAs may not occur more than once during a 12-month period (this rule applies to each separate IRA you own). A transfer occurs when the funds are moved from one IRA to another without you having control or custody of the funds. There are no time or frequency limits on the number of transfers permitted.
How Do I Move Funds From a Qualified Plan (QP) or Tax-Sheltered annuity (TSA) to an IRA?
An eligible QP or TSA distribution may be a direct rollover or a rollover into an IRA. Generally, an eligible rollover distribution is any distribution except one that is (1) one of a series of substantially equal periodic payments over the single or joint life expectancy of the employee and beneficiary or for a specified period of ten years or more and (2) a required distribution for an employee age 70½ or older.
A rollover occurs when funds distributed from your QP or TSA are paid directly to you then subsequently rolled over to you into an IRA within 60 days.
A direct rollover is a QP or TSA distribution that is sent directly from the plan administrator (employer) to an IRA.
QP and TSA distributions paid directly to you are subject to a mandatory 20% federal income tax withholding at the time of distribution.
Funds moved to an IRA via a direct rollover are not subject to withholding.
As with an IRA-to-IRA rollover, a QP or TSA recipient has 60 calendar days from the date of receipt to roll over the taxable portion of the distribution to an IRA. The 12-month limitation does not apply to rollovers from a QP or TSA into an IRA.
When Is the Contribution Deadline for Funding an IRA?
IRAs for the taxable year can be opened and funded any time between January 1 and the date your tax return is due for the year, excluding extensions. This due date is normally April 15 of the following year.
Simply see any of our IRA representatives. We will explain the nature of these accounts in more detail and help you complete the simple forms necessary to establish your IRA.
Basic Rules for Determining IRA Deductibility
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