Everything you need to know about IRA's

Everything you need to know about IRA's

What's New for 2008

Traditional IRA contribution and deduction limit. The contribution limit to your traditional IRA for 2008 will be increased to the smaller of the following amounts:

• $5,000, or
  
• 
  
• your taxable compensation for the year.
  
• 
  

If you were age 50 or older before 2009, the most that can becontributed to your traditional IRA for 2008 will be the smaller of the

following amounts:

• $6,000, or
  
• 
  
• Your taxable compensation for the year.
  
• 
  

Modified AGI limit for traditional IRA contributions increased. For 2008, 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 $85,000 but less than $105,000 for a married couple filing a joint return or a qualifying widow(er),
  
• 
  
• More than $53,000 but less than $63,000 for a single individual or head of household, or
  
• 
  
• Less than $10,000 for a married individual filing a separate return.
  
• 
  

For 2008, if you either live with your spouse or file a joint return,

and your spouse is covered by a retirement plan at work, but you are
not, your deduction is phased out if your AGI is more than $159,000 but
less than $169,000. If your AGI is $169,000 or more, you cannot take a
deduction for contributions to a traditional IRA. See How Much Can You Deduct? in this chapter.

Introduction

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?

A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.

Who Can Set Up a Traditional IRA?

You can set up and make contributions to a traditional IRA if

• You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
  
• 
  
• You were not age 70½ 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 70½,
each of you can set up an IRA. You cannot both participate in the same
IRA.

When Can a Traditional IRA Be Set Up?

You can set up a traditional IRA at any time. However, the time for making contributions for any year is limited. See When Can Contributions

Be Made, later.

How Can a Traditional IRA Be Set Up?

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.
  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.

Individual Retirement 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
  

  the deductible amount for the year. 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 70½. See When
  

Simplified Employee Pension (SEP)

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.

How Much Can Be Contributed?


There are limits and other rules that affect the amount that can be contributed to a traditional IRA. These limits and rules are explained below.

General Limit

For 2007, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

• $4,000 ($5,000 if you are age 50 or older), or
  
• 
  
• Your taxable compensation (defined earlier) for the year.
  
• 
  

This general limit may be increased to $7,000 if you participated in a 401(k) plan maintained by an employer who went into

bankruptcy in an
earlier year. For more information, see Catch-up contributions in certain employer bankruptcies later.

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.
  If you invest in an annuity or endowment contract under an individual
retirement annuity, no more than $4,000 ($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.

Catch-up contributions in certain employer bankruptcies.
  If you participated in a 401(k) plan and the employer who maintained
the plan went into bankruptcy, you may be able to contribute an
additional $3,000 to your IRA. For this to apply, the following
conditions must be met.

• You must have been a participant in a 401(k) plan under which the employer matched at least 50% of your contributions to the
  

  plan with stock
  of the company.
  

  
  
• 
  
• You must have been a participant in the 401(k) plan 6 months before the employer went into bankruptcy.
  
• 
  
• the employer (or a controlling corporation) must have been a debtor in a bankruptcy case in an earlier year.
  
• 
  
• The employer (or any other person) must have been subject to indictment or conviction based on business transactions related to the bankruptcy.
  
  

Spousal IRA Limit

For 2007, 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:

1. $4,000 ($5,000 if you are age 50 or older), or
   
2. 
   
3. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two
   

   amounts.
   

   1. Your spouse's IRA contribution for the year to a traditional IRA.
      
   2. 
      
   3. Any contributions for the year to a Roth IRA on behalf of your spouse.
      

Less Than Maximum Contributions


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 2007. Although he can contribute up to
$4,000 for 2007, he contributes only $2,000. After April 15, 2008,
Rafael cannot make up the difference between his actual contributions
for 2007 ($2,000) and his 2007 limit ($4,000). He cannot contribute
$2,000 more than the limit for any later year.

What if You Inherit an IRA?

If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive.

Inherited from spouse.   If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:

1. Treat it as your own IRA by designating yourself as the account owner.

2. Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:

   1. Qualified employer plan,

   2. Qualified employee annuity plan (section 403(a) plan),

   3. Tax-sheltered annuity plan (section 403(b) plan),

   4. Deferred compensation plan of a state or local government (section 457 plan), or

3. Treat yourself as the beneficiary rather than treating the IRA as your own.

Treating it as your own.   You will be considered to have chosen to treat the IRA as your own if:

• Contributions (including rollover contributions) are made to the inherited IRA, or

• You do not take the required minimum distribution for a year as a beneficiary of the IRA.

You will only be considered to have chosen to treat the IRA as your own if:

• You are the sole beneficiary of the IRA, and

• You have an unlimited right to withdraw amounts from it.

  However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. 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.   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.   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.

Can You Move Retirement Plan Assets?

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.   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account 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. Transfers to Roth IRAs from other retirement plans.    For 2008, under certain conditions, you can move assets from an eligible retirement plan to a Roth IRA. For more information, see Can You Move Amounts Into a Roth IRA? in chapter 2.

Rollovers

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.â€

Note.

An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan.

Kinds of rollovers to a traditional IRA.   You can roll over amounts from the following plans into a traditional IRA:

• A traditional IRA,

• An employer's qualified retirement plan for its employees,

• A deferred compensation plan of a state or local government (section 457 plan), or

• A tax-sheltered annuity plan (section 403 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.   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.   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.   Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement 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).

• Tax-sheltered annuities (section 403(b) annuities).

Time Limit for Making a Rollover Contribution

You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. However, see Extension of rollover period, later.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

Rollovers completed after the 60-day period.   In the absence of a waiver, amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer's plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% additional tax on early distributions as discussed later under Early Distributions.   Unless there is a waiver or an extension of the 60-day rollover period, any contribution you make to your IRA more than 60 days after the distribution is a regular contribution, not a rollover contribution.

Example.

You received a distribution in late December 2007 from a traditional IRA that you do not roll over into another traditional IRA within the 60-day limit. You do not qualify for a waiver. This distribution is taxable in 2007 even though the 60-day limit was not up until 2008.

Automatic waiver.   The 60-day rollover requirement is waived automatically only if all of the following apply.

• The financial institution receives the funds on your behalf before the end of the 60-day rollover period.

• You followed all the procedures set by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan).

• The funds are not deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution.

• The funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period.

• It would have been a valid rollover if the financial institution had deposited the funds as instructed.

Other waivers.   If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement. You apply by following the procedures for applying for a letter ruling. Those procedures are stated in a revenue procedure generally published in the first Internal Revenue Bulletin of the year. You must also pay a user fee with the application. For how to get that revenue procedure, see chapter 6.

Rollover From One IRA Into Another

You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA.

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. See Recharacterizations in this chapter for more information.

Waiting period between rollovers.   Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.   The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

Example.

You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax-free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.

Exception.   There is an exception to the rule that amounts rolled over tax free into an IRA cannot be rolled over tax free again within the 1-year period beginning on the date of the original distribution. The exception applies to a distribution which meets all three of the following requirements.

1. It is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution.

2. It was not initiated by either the custodial institution or the depositor.

3. It was made because:

   1. The custodial institution is insolvent, and

   2. The receiver is unable to find a buyer for the institution.

Rollover From Employer's Plan Into an IRA

You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):

• Employer's qualified pension, profit-sharing or stock bonus plan,

• Annuity plan,

• Tax-sheltered annuity plan (section 403(b) plan), or

• Governmental deferred compensation plan (section 457 plan).

A qualified plan is one that meets the requirements of the Internal Revenue Code.

Eligible rollover distribution.   Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following.

1. A required minimum distribution (explained later under When Must You Withdraw Assets? (Required Minimum Distributions)).

2. A hardship distribution.

3. Any of a series of substantially equal periodic distributions paid at least once a year over:

   1. Your lifetime or life expectancy,

   2. The lifetimes or life expectancies of you and your beneficiary, or

   3. A period of 10 years or more.

4. Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains.

5. A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan.

6. Dividends on employer securities.

7. The cost of life insurance coverage.

  Your rollover into a traditional IRA may include both amounts that would be taxable and amounts that would not be taxable if they were distributed to you, but not rolled over. To the extent the distribution is rolled over into a traditional IRA, it is not includible in your income.

Converting From Any Traditional IRA Into a Roth IRA

You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.

• Your modified AGI for Roth IRA purposes (explained in chapter 2) is not more than $100,000.

• You are not a married individual filing a separate return.

Note.

If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.

Allowable conversions.   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply.   You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early distributions. See When Can You Withdraw or Use Assets, later for more information on distributions from traditional IRAs and Early Distributions, later, for more information on the tax on early distributions. Periodic distributions.   If you have started taking substantially equal periodic payments from a traditional IRA, you can convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments. The 10% additional tax on early distributions will not apply even if the distributions are not qualified distributions (as long as they are part of a series of substantially equal periodic payments). Required distributions.   You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70½) under the required distribution rules (discussed in this chapter). Inherited IRAs.   If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA.

All of this information was taken straight from the IRS website at

http://www.irs.gov/publications/p590/ch01.html