IRAs
An Individual Retirement Arrangement (IRA) is a tax-deferred savings plan for retirement. Earnings on a traditional IRA are not subject to tax until they are withdrawn. Contributions are limited to a combined total of $5,000 per year per taxpayer ($6,000 if at least age 50). IRAs are available to all taxpayers with earned income during the year.
Retirement Contribution Credit
You may qualify for a credit of 50%, 20%, or 10% on the first $2,000 contributed to a retirement savings plan. This credit is for taxpayers with modified adjusted gross incomes of up to $56,500 if Married Filing Jointly, $42,375 if Head of Household, and $28,250 for all other filing statuses. This credit is in addition to any IRA deduction claimed on the return.
An IRA may be established as a:
There are other issues you need to be aware of regarding
Contact your neighborhood Jackson Hewitt office for more information or assistance. Use the Office Locator feature available on this Web site or call 1-800-234-1040 to find the office nearest you.
Deductible Traditional IRA
You can contribute up to $5,000 per year to your traditional IRA and you may be able to deduct the contribution directly from the income on your tax return. If you are at least age 50, you may contribute up to $6,000. If you are covered by your employer's pension plan, the contribution is only fully deductible if your modified adjusted gross income is below $55,000. If you are married filing a joint return and both of you are covered by a pension plan, your contributions are fully deductible only if your modified adjusted gross income is below $90,000. The deductible contribution is reduced or eliminated as your income increases. If you and your spouse both work and one of you is not covered by a pension plan, the income limits for fully deductible contributions are different for each of you. If you are not covered by a pension plan, any contribution up to $5,000 ($6,000 if age 50 or older) is deductible from your income regardless of the amount of earnings. All distributions from deductible traditional IRAs are taxable.
Back to Top
Nondeductible Traditional IRA
If you are covered by a pension plan, depending on your filing status and modified adjusted gross income, all or part of your traditional IRA contribution may be nondeductible. Form 8606, Nondeductible IRAs, must be completed each year a nondeductible IRA contribution is made. When a distribution is received, Form 8606 is used to determine how much of the distribution is taxable.
Back to Top
Roth IRA
The Roth IRA was first available in 1998 and is subject to most of the rules of the original (traditional) IRAs. The Roth IRA also allows you to contribute up to $5,000 per year ($6,000 if age 50 or older) but there is no deduction from your income for the contribution. Qualified distributions are not taxable. Once your modified adjusted gross income reaches $107,000 ($169,000 if married filing a joint return), your allowable contribution begins to be reduced.
Generally, you must participate in a Roth IRA for at least five years and be over age 59½ to receive a distribution from a Roth IRA without being assessed a 10% additional tax for early withdrawal.
Finally, there is an option available to taxpayers with an adjusted gross income of less than $100,000 to convert their traditional IRA to a Roth IRA. In the year the conversion is made, you must pay taxes on all of the distribution you convert, except any existing nondeductible contributions. The conversion amount is exempt from the 10% additional tax.
For 2010 conversions only, the taxes on your conversion were split in half. The first half is reported on your 2011 tax return and the second half will be reported on your 2012 return.
Back to Top
Spousal IRA
If you work and your spouse does not, you may set up an IRA for each of you and contribute up to $5,000 per person per year into each IRA ($6,000 if age 50 or older) to each IRA. When determining deductibility of the IRA contributions, the nonworking spouse is not considered to be covered by a pension plan. If the working spouse is covered by a pension plan, your allowable deductible contributions are limited once your adjusted gross income reaches $169,000.
Back to Top
Deemed IRA
If you have a qualified plan through your employer that maintains a separate account for each employee and you make voluntary contributions to that account, the account is deemed a traditional IRA or Roth IRA if the account otherwise meets the requirements of a traditional IRA.
Back to Top
IRA Withdrawals
Except for the Portion of a distribution that represents nondeductible contributions, any funds withdrawn before age 59½ from a traditional or a Roth IRA will be subject to a 10% additional tax for early withdrawal unless an exception applies. Some exceptions to this additional tax are:
- You are totally and permanently disabled.
- You are the beneficiary of a deceased IRA owner.
- You use the distributions to buy, build, or rebuild a qualified first home, up to $10,000.
- You are unemployed and use the distribution to pay for health insurance premiums.
- You have unreimbursed medical expenses in excess of 7.5% of your adjusted gross income.
- You use the distribution for qualified higher education expenses.
Back to Top
Minimum Distribution Rules for IRAs
The minimum distribution rule is reinstated for tax year 2010 and forward.
Although distributions from a Roth IRA are not required at any age, under traditional IRA rules, you must withdraw the entire balance of your IRAs or start receiving periodic distributions by April 1 of the year following the year in which you reach age 70½. The withdrawals must occur on a yearly basis and continue until you die or until your IRAs are depleted.
If you have more than one IRA, you may take the minimum required distribution from any one or more of the individual IRAs.
Distributions from a Roth IRA are not required at any age.
If you are age 70½ or older you may make a direct charitable contribution of up to $100,000 tax-free from your traditional IRAs. The contribution must be a trustee-to-trustee transfer which means the institution that handles your IRA must send the money to the charitable organization for you. Not only is this a tax-free distribution, but you can include the charitable contribution in your required minimum distribution amount.
Back to Top
Retirement Savings Contributions Credit
The Retirement Savings Contributions Credit is a percentage (50%, 20%, or 10%) of up to $2,000 of contributions to an employer elective deferral plan or IRA. No credit is allowed on Married Filing Jointly returns with a modified adjusted gross income over $52,000, Head of Household returns over $39,000, and Single, Qualifying Widow(er) or Married Filing Separately returns over $26,000. You must be age 18 or older to claim the credit. In addition, you cannot be a student as defined in the dependency tests or be claimed as a dependent on another's return. A distribution from a retirement plan any time in the preceding two tax years or the current tax year reduces the amount available for the credit. This credit is in addition to any deduction or exclusion for the contribution.
Back to Top
Back to Tax Topics