Any individual under age 70½ who has earned income can open and contribute to a traditional Individual Retirement Account, regardless of the amount of Adjusted Gross Income.
Contributions to a “traditional” IRA are either deductible or non-deductible. How much can be deducted depends on the taxpayer’s situation.
Deductible contributions are made with “pre-tax” dollars. If all of your contributions to all of your IRA accounts over the years were fully deductible, then all IRA distributions are fully taxable. Amounts that were “rolled-over” to an IRA from a pre-tax employer plan like a 401(k) are treated as deductible contributions.
If you are an active participant in an employer-sponsored pension plan, such as a 401(k), a 403(b) or a SEP, the amount of your traditional IRA contribution that is deductible is phased-out based on your “modified” Adjusted Gross Income (MAGI). “Modified” AGI in this case begins with “regular” AGI and adds back the-
• foreign income and housing exclusions
• savings bond interest exclusion for higher education costs
• adoption assistance benefits exclusion
• deduction for student loan interest
• deduction for qualified tuition and fees
• deduction for domestic production activities
For tax year 2010 the phase-out range is MAGI reaches $50,000 - $60,000 if filing as Single or Head of Household, or $80,000 - $100,000 if married and filing a joint return.
Non-deductible contributions are made with “after-tax” dollars. You have already paid income tax on these contributions. Accumulated non-deductible contributions make up your “basis” in the IRA. If some of your IRA contributions over the years were non-deductible, then a portion of any IRA distribution is a tax-free return of your after-tax contributions. The tax-free portion is determined by a special formula and is calculated on IRS Form 8606.
A taxpayer whose situation would permit a fully deductible maximum IRA can elect to have all or part of the contribution treated as “non-deductible”. It is possible that available tax deductions and credits would reduce a taxpayer’s tax liability to “0” or below – so there would be no, or only partial, tax benefit from deducting the IRA contribution.
Many taxpayers have more then one IRA account, and each individual account may have a different mix of deductible and non-deductible contributions. However, when you calculate the tax-free portion of a traditional IRA distribution all monies in all traditional IRA accounts are lumped together.
Individuals who take money out of an IRA before reaching age 59½ will generally be subject to a 10% “premature withdrawal” penalty. There are several exceptions under which you can avoid the 10% penalty – more on these exceptions in a future entry in the series.
You must begin to take annual minimum distributions from your traditional IRA once you reach age 70½. When you turn 70½ you can no longer make contributions to a traditional IRA, even if you continue to work and have earned income. Upon your death your beneficiaries will be taxed on withdrawals from an inherited traditional IRA.
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Contributions to a “traditional” IRA are either deductible or non-deductible. How much can be deducted depends on the taxpayer’s situation.
Deductible contributions are made with “pre-tax” dollars. If all of your contributions to all of your IRA accounts over the years were fully deductible, then all IRA distributions are fully taxable. Amounts that were “rolled-over” to an IRA from a pre-tax employer plan like a 401(k) are treated as deductible contributions.
If you are an active participant in an employer-sponsored pension plan, such as a 401(k), a 403(b) or a SEP, the amount of your traditional IRA contribution that is deductible is phased-out based on your “modified” Adjusted Gross Income (MAGI). “Modified” AGI in this case begins with “regular” AGI and adds back the-
• foreign income and housing exclusions
• savings bond interest exclusion for higher education costs
• adoption assistance benefits exclusion
• deduction for student loan interest
• deduction for qualified tuition and fees
• deduction for domestic production activities
For tax year 2010 the phase-out range is MAGI reaches $50,000 - $60,000 if filing as Single or Head of Household, or $80,000 - $100,000 if married and filing a joint return.
Non-deductible contributions are made with “after-tax” dollars. You have already paid income tax on these contributions. Accumulated non-deductible contributions make up your “basis” in the IRA. If some of your IRA contributions over the years were non-deductible, then a portion of any IRA distribution is a tax-free return of your after-tax contributions. The tax-free portion is determined by a special formula and is calculated on IRS Form 8606.
A taxpayer whose situation would permit a fully deductible maximum IRA can elect to have all or part of the contribution treated as “non-deductible”. It is possible that available tax deductions and credits would reduce a taxpayer’s tax liability to “0” or below – so there would be no, or only partial, tax benefit from deducting the IRA contribution.
Many taxpayers have more then one IRA account, and each individual account may have a different mix of deductible and non-deductible contributions. However, when you calculate the tax-free portion of a traditional IRA distribution all monies in all traditional IRA accounts are lumped together.
Individuals who take money out of an IRA before reaching age 59½ will generally be subject to a 10% “premature withdrawal” penalty. There are several exceptions under which you can avoid the 10% penalty – more on these exceptions in a future entry in the series.
You must begin to take annual minimum distributions from your traditional IRA once you reach age 70½. When you turn 70½ you can no longer make contributions to a traditional IRA, even if you continue to work and have earned income. Upon your death your beneficiaries will be taxed on withdrawals from an inherited traditional IRA.
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TTFN
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