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not subject to tax until they are withdrawn.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 $5,500 per year per taxpayer ($6,500 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 $61,000 if
Married Filing Jointly, $45,750 if Head of Household, and $30,500 for all other
filing statuses. This credit is in addition to any IRA deduction claimed on the
An IRA may be established as a:
- Nondeductible Traditional IRA
- Roth IRA
- Spousal IRA
- Deemed IRA
There are other issues you
need to be aware of regarding
- IRA Withdrawals
- Retirement Savings Contribution Credit
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.
You can contribute up to $5,500 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 $6,500. If you are
covered by your employer's pension plan, the contribution is only fully
deductible if your modified adjusted gross income is below $61,000. 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 $98,000. 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 $5,500 ($6,500 if age 50 or older) is deductible from your
income regardless of the amount of earnings. All distributions from deductible
traditional IRAs are taxable.
Nondeductible Traditional IRA
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.
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 $5,500 per year ($6,500 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
$116,000 ($183,000 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
Finally, there is an option available to
taxpayers to convert their traditional IRA to a Roth IRA. There is no maximum
income limitation for conversions so you can convert your traditional IRA to a
Roth IRA at any time.
Generally, 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.
If you work and your spouse does not, you may set up an
IRA for each of you and contribute up to $5,500 per person per year into each
IRA ($6,500 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
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
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
- You are the beneficiary of a deceased IRA owner.
use the distributions to buy, build, or rebuild a qualified first home, up to
- You are unemployed and use the distribution to pay for health
- You have unreimbursed medical expenses in excess of
10% of your adjusted gross income.
- You use the distribution for
qualified higher education expenses.
Minimum Distribution Rules
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.
If you are age 70 ½ or older you may make a
direct charitable contribution of up to $100,000 tax-free from your traditional
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
a Roth IRA are not required at any age.