An individual retirement arrangement, or IRA, is a personal savings plan allowing you
to set aside money for retirement, while offering you tax advantages. You may be able to
deduct some or all of your contributions to your IRA. Amounts in your IRA, including
earnings, generally are not taxed until distributed to you.
To contribute to an IRA, you must be under age 70 ½ at the end of the tax year and
have taxable compensation, such as wages, salaries, commissions, tips, bonuses, and net
income from self-employment involving significant services provided. In addition, taxable
alimony and separate maintenance payments received by an individual are treated as
compensation for IRA purposes.
Compensation usually does not include earnings and profits from property, such as
rental income, interest and dividend income, or any amount received as pension or annuity
income, or as deferred compensation.
The most you can contribute to your IRA for any year is the smaller of $2,000 or your
taxable compensation for the year. If neither you nor your spouse are covered by a
retirement plan, your contributions will be fully deductible.
If you are covered or considered covered by a retirement plan, your IRA deduction may
be reduced or eliminated, depending on the amount of your income and your filing status.
If you are not covered by a retirement plan but your spouse is, you are considered covered
by a plan unless you and your spouse live apart the entire year and file separate returns.
Figure your deduction using the worksheets in the instructions or in Publication
590. You cannot claim an IRA deduction on Form 1040EZ; you
must use either Form 1040A or 1040.
Form 8606 should be attached to your
return if any of your IRA contributions are not deductible. If both you and your spouse
work, or otherwise qualify, each of you may contribute to separate IRAs.
If your spouse has no taxable compensation, you can contribute to a separate spousal
IRA on his/her behalf, if you file a joint return and your spouse is under age 70 ½ at
the end of the year.
If your spouse has a small amount of compensation (generally less than $250) then that
spouse may choose to be treated as having no compensation for purposes of IRA contribution
and deduction limits, and likewise use the rules for spousal IRAs. Your total contribution
to both your IRA and the spousal IRA is limited to the smaller of $4,000 or your taxable
compensation. You cannot contribute more than $2,000 to either IRA for the year.
The deadline for making a contribution to an IRA for the year is the due date of your
return, not including any extensions of time to file.
You may choose to take the deduction on a return filed before the contribution is
actually made, provided you make the contribution by the due date of that return, not
including extensions. Amounts you withdraw from your IRA are fully or partially taxable in
the year you withdraw them. If you made only deductible contributions, withdrawals are
fully taxable. If you made any non-deductible contributions, withdrawals are partially
taxable. Use Form 8606 to figure the taxable
portion of withdrawals.
Amounts you withdraw before you reach age 59 ½ may be subject to a 10% additional tax.
You also may owe an additional tax if you do not begin to withdraw minimum distribution
amounts by April 1st of the year after you reach age 70 ½. These additional taxes are
figured and reported on Form 5329. See the
form instructions for exceptions to the additional tax.
Additional information on IRA changes for 1997 can be found in Publication 553, Highlights of Tax Changes.
More information on IRAs, including information on tax-free transfers and rollovers, is
available in Publication 590, Individual Retirement Arrangements
(IRAs), which can be ordered by calling 1-800-829-3676.
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