(Also see Qualified Retirement Plans or Non-Qualified Deferred Compensation Plans)
An Individual Retirement Arrangement (IRA), commonly called an Individual Retirement Account, is a personal retirement savings plan available to anyone, regardless of age, who receives taxable compensation during the year. For IRA contribution purposes, compensation includes wages, salaries, fees, tips, bonuses, commissions, taxable alimony, and separate maintenance payments.

Husbands and wives may each have an IRA, even if one person in that marriage is not working. A person’s annual contribution, whether made to just one or to multiple IRA accounts, is limited to the lesser of total taxable compensation or to the normal yearly amount shown in the above table. Persons age 50 or older may make an additional catch-up contribution in the amount indicated.

There is no minimum or required IRA contribution, and all earnings on the amounts in an IRA are untaxed until withdrawn. In the case of the Roth IRA, withdrawals may even be tax-free provided certain minimum rules discussed later are met.

Contributions to a Roth IRA are never tax-deductible. Contributions to a traditional IRA may or may not be deductible in the tax year made, depending on the owner’s income tax filing status, Adjusted Gross Income (AGI), and eligibility to participate in a tax-qualified retirement plan through employment.

A working spouse not covered by a retirement plan through employment may make a tax-deductible contribution to an IRA despite the other spouse’s coverage under an employer-provided retirement plan. Deductibility of the IRA phases out based on AGI limits.

Money may be withdrawn from an IRA at any time, but on withdrawal it may be taxed and/or penalized. Withdrawals from a traditional IRA will always be taxed, either in whole or in part, at ordinary income tax rates. Except as noted, withdrawals from a traditional IRA prior to age 59 1/2 will result in a 10% excise tax as well as an ordinary income tax. The potential income taxes and early withdrawal penalties on Roth and Education IRAs are treated differently.

If nondeductible contributions were made to a traditional IRA, part of any withdrawal from that IRA will not be taxed. For more detail on this you should consult your accountant. The required IRS filing is Form 8606, a tax document that must be completed and filed with your income tax return to report both nondeductible traditional IRA contributions and withdrawals whenever they occur.

Mandatory distributions for traditional IRAs must begin no later than April 1 of the year following the year the IRA owner reaches age 70 1/2. Failure to take required minimum distributions at that age results in a 50% excise tax on the amounts not distributed. Roth IRAs have no mandatory distribution requirement.

There are many types of IRA:

An Individual Retirement Account
Is either a traditional or Roth IRA set up with a financial institution in which contributions may be invested in many types of securities such as stocks, bonds, money markets, CDs, etc.

An Individual Retirement Annuity
Is either a traditional or Roth IRA set up with a life insurance company through the purchase of a special annuity contract.

An Employer and Employee Association Trust Account, or Group IRA
Is a traditional IRA set up by employers, unions, and other employee associations for employees or members.

A Simplified Employee Pension (SEP-IRA)
Is a traditional IRA set up by an employer for a firm’s employees. An employer may contribute up to $30,000 or 15% of an employee’s compensation annually to each employee’s IRA. (See SEP)

A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA)
Is a traditional IRA set up by a small employer for a firm’s employees. In 2001, an employee may contribute up to $11,500 per year to these IRAs. The allowable contribution will increase in $500 increments whenever the cumulative effects of inflation indicate such a rise is needed. The employer sponsoring the SIMPLE will also make a matching contribution based on a percentage of the employee’s pay. (See SIMPLE)

A Spousal IRA
Is either a traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has less than the maximum allowable annual contribution limit in annual compensation. The couple must file a joint tax return for the year of contribution. The working spouse may contribute up to the maximum allowable annual contribution limit per year to both the Spousal IRA and to his or her own IRA as well.

A Rollover (Conduit) IRA
Is a traditional IRA set up by an individual to receive a distribution from a qualified retirement plan. Distributions transferred to a rollover IRA are not subject to any contribution limits. Additionally, the distribution may be eligible for subsequent transfer into a qualified retirement plan available through a new employer.

An Inherited IRA
Is either a traditional or a Roth IRA acquired by a beneficiary who is not the spouse of a deceased IRA owner. Special rules apply to an inherited IRA that we will not go into here

A Traditional IRA
Is the term for a regular IRA available to those under age 70 1/2 who have earned income (i.e., job compensation). Earnings within the traditional IRA grow tax-deferred until withdrawal. Withdrawals must begin, and will be taxed, when the owner reaches age 70 1/2. If required distributions are not taken at that age, a 50% penalty will be assessed on the amount not taken. When made, contributions may or may not be tax deductible. If a traditional IRA owner participates in an employer’s qualified retirement plan on any day in the tax year, the deductibility of contributions declines to zero between certain AGI ranges as outlined in the deductibility table shown above. A working spouse not covered by a retirement plan through employment may make a tax-deductible contribution to a traditional IRA of up to the applicable annual limit shown in the above table despite the other spouse’s coverage under an employer-provided retirement plan. When the couple’s AGI reaches $150,000, deductibility for such contributions begins to decline, and it reaches zero at a joint AGI of $160,000.

A Roth IRA is one in which:

• Contributions to the account are not deductible.
• “Qualified” distributions (i.e., withdrawals) from the account are not taxable.
• Earnings on the account are taxable and subject to an early withdrawal penalty only when a withdrawal is not a “qualified” distribution.

A “qualified” distribution from a Roth IRA is a withdrawal that meets one or more of the following:

• Made after the taxpayer attains age 59 1/2.
• Made to a beneficiary after the taxpayer’s death.
• Made because the taxpayer is disabled.
• Made by a first-time homebuyer to acquire a principal residence.
• No withdrawal except those attributable to previously taxed contributions will be a qualified distribution unless it is made after the five-taxable-year period beginning with the tax year in which the taxpayer first contributed to a Roth IRA.

Annual contributions to a Roth IRA are subject to the contribution limits as shown in the above table, as reduced by any contribution made to a traditional IRA. Contributions to a Roth IRA may be made even after the owner reaches age 70 1/2. The annual contribution limit is phased out as AGI increases from $150,000 to $160,000 (married filing jointly) or $95,000 to $110,000 (single filer).

Amounts in traditional IRAs may be transferred to Roth IRAs provided the taxpayer’s AGI (married or single) for the transfer year is $100,000 or less. Transferred amounts must be included in that year’s income, but the money transferred will be exempt from the 10% excise tax for a withdrawal prior to age 59 1/2. No withdrawal allocable to earnings on the transferred amounts is considered to be a qualified distribution unless it is made more than five tax years after the transfer.

Further details on IRA provisions may be found in IRS Publication 590, Individual Retirement Arrangements. This publication may be obtained at no cost by calling 1-800-TAX-FORM, or it may be downloaded online.

If you are interested in more information regarding IRA accounts, please contact our office at (301) 590-0006.