| Pub. 590, Individual Retirement Arrangements (IRAs) |
2005 Tax Year |
1.
Traditional IRAs
Hurricane 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:
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:
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.
Traditional IRA contribution and deduction limit. The contribution limit to your traditional IRA for 2006 will be the smaller of the following amounts:
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:
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?
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.
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.
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.
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.
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.
For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a
decree of divorce or separate
maintenance.
Table 1-1. Compensation for Purposes of an IRA
| 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.
|
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?
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 $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 70½. See When
Must You Withdraw Assets? (Required Minimum Distributions), later.
Individual Retirement Annuity
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 70½. See When Must You
Withdraw Assets? (Required Minimum Distributions), later.
Individual Retirement Bonds
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 70½. If you die, interest will stop 5 years after your death, or on the date
you would have reached age 70½, whichever is earlier.
-
You cannot transfer the bonds.
If you cash (redeem) the bonds before the year in which you reach age 59½, you may be subject to a 10% additional tax. See
Age 59½ Rule under Early Distributions, later. You can roll over redemption proceeds into IRAs.
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. See Publication 560 for more information about SEPs.
Employer 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.
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.
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?
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.
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.
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' 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.
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
-
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).
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.
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 ($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.
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. 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).
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 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 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 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?
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 70½.
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.
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 70½ rule.
Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year.
You attain age 70½ 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 70½ 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 70½ on January 1, 2006.
Designating year for which contribution is made.
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.
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.
You do not have to contribute to your traditional IRA for every tax year, even if you can.
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' 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.
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.
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.
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?
The 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.
For purposes of the IRA deduction, federal judges are covered by an employer plan.
For Which Year(s) Are You 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.
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.
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.
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.
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).
Volunteer firefighters.
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 Plan
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 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.
Table 1-2. Effect of Modified AGI 1 on Deduction If You Are Covered by a Retirement Plan at Work
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 less
|
a full deduction.
|
more than $50,000
but less than $60,000
|
a partial deduction.
|
|
$60,000 or more
|
no deduction.
|
married filing jointly or
qualifying widow(er) |
$70,000 or less
|
a full deduction.
|
more than $70,000
but less than $80,000
|
a partial deduction.
|
|
$80,000 or more
|
no deduction.
|
| married filing separately
2 |
less than $10,000
|
a partial deduction.
|
|
$10,000 or more
|
no 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).
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Table 1-3. Effect of Modified AGI 1 on Deduction If You Are NOT Covered by a Retirement Plan at Work
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 amount
|
a full deduction.
|
married filing jointly or separately with a spouse who is not covered by a plan
at work
|
any amount
|
a full deduction.
|
married filing jointly with a spouse who is covered by a plan
at work
|
$150,000 or less
|
a full deduction.
|
more than $150,000
but less than $160,000
|
a partial deduction.
|
|
$160,000 or more
|
no deduction.
|
married filing separately with a spouse who is covered by a plan
at work
2 |
less than $10,000
|
a partial deduction.
|
|
$10,000 or more
|
no 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.
|
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.
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.
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).
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.
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.
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.
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.
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 Deduction
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