1.   Traditional IRAs

Table of Contents

What's New for 2013

Traditional IRA contribution and deduction limit. The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts:

  • $5,500, or

  • Your taxable compensation for the year.

If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts:

  • $6,500, or

  • Your taxable compensation for the year.

For more information, see How Much Can Be Contributed? in this chapter.

Modified AGI limit for traditional IRA contributions increased. For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

  • More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er),

  • More than $59,000 but less than $69,000 for a single individual or head of household, or

  • Less than $10,000 for a married individual filing a separate return.

If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? in this chapter.

Net Investment Income Tax. For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). However, these distributions are taken into account when determining the modified adjusted gross income threshold. Distributions from a nonqualified retirement plan are included in net investment income. See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information.

What's New for 2014

Modified AGI limit for traditional IRA contributions increased. For 2014, 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 AGI is:

  • More than $96,000 but less than $116,000 for a married couple filing a joint return or a qualifying widow(er),

  • More than $60,000 but less than $70,000 for a single individual or head of household, or

  • Less than $10,000 for a married individual filing a separate return.

If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $181,000 but less than $191,000. If your modified AGI is $191,000 or more, you cannot take a deduction for contributions to a traditional IRA.

Introduction

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.” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE 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.

Who Can Open a Traditional IRA?

You can open 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 open an IRA. You cannot both participate in the same IRA. If you file a joint return, only one of you needs to have compensation.

What Is Compensation?

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 all of the items discussed next (even if you have more than one type).

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 the deductible part 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.

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.

Nontaxable combat pay.   If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2013 Form W-2 with code Q.

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.
nontaxable combat pay.  
  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.

  • Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b.

  • Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.

When Can a Traditional IRA Be Opened?

You can open 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 Opened?

You can open different kinds of IRAs with a variety of organizations. You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also open 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 the deductible amount for the year. 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 open 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 the deductible amount for an IRA for the year, 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.

  • 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.

Required Disclosures

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 open your IRA. However, the sponsor does not have to give you the statement until the date you open (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 Kay Bailey Hutchison 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.

Qualified reservist repayments.   If you were a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions (defined later under Early Distributions) you received. You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or a similar arrangement.

Limit.   Your qualified reservist repayments cannot be more than your qualified reservist distributions, explained under Early Distributions , later.

When repayment contributions can be made.   You cannot make these repayment contributions later than the date that is 2 years after your active duty period ends.

No deduction.   You cannot deduct qualified reservist repayments.

Reserve component.   The term “reserve component” means the:
  • Army National Guard of the United States,

  • Army Reserve,

  • Naval Reserve,

  • Marine Corps Reserve,

  • Air National Guard of the United States,

  • Air Force Reserve,

  • Coast Guard Reserve, or

  • Reserve Corps of the Public Health Service.

Figuring your IRA deduction.   The repayment of qualified reservist distributions does not affect the amount you can deduct as an IRA contribution.

Reporting the repayment.   If you repay a qualified reservist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606.

Example.   In 2013, your IRA contribution limit is $5,500. However, because of your filing status and AGI, the limit on the amount you can deduct is $3,500. You can make a nondeductible contribution of $2,000 ($5,500 - $3,500). In an earlier year you received a $3,000 qualified reservist distribution, which you would like to repay this year.

  For 2013, you can contribute a total of $8,500 to your IRA. This is made up of the maximum deductible contribution of $3,500; a nondeductible contribution of $2,000; and a $3,000 qualified reservist repayment. You contribute the maximum allowable for the year. Since you are making a nondeductible contribution ($2,000) and a qualified reservist repayment ($3,000), you must file Form 8606 with your return and include $5,000 ($2,000 + $3,000) on line 1 of Form 8606. The qualified reservist repayment is not deductible.

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.

General Limit

For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

  • $5,500 ($6,500 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.) Qualified reservist repayments do not affect this limit.

Examples.

George, who is 34 years old and single, earns $24,000 in 2013. His IRA contributions for 2013 are limited to $5,500.

Danny, an unmarried college student working part time, earns $3,500 in 2013. His IRA contributions for 2013 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 $5,500 ($6,500 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.

Kay Bailey Hutchison Spousal IRA Limit

For 2013, 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:

  1. $5,500 ($6,500 if you are age 50 or older), or

  2. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.

    1. Your spouse's IRA contribution for the year to a traditional IRA.

    2. 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 $11,000 ($12,000 if only one of you is age 50 or older or $13,000 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 of them was age 50 by the end of 2013. For the year, Carl has taxable compensation of $30,000. He plans to contribute (and deduct) $5,500 to a traditional IRA. If he and Kristin file a joint return, each can contribute $5,500 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 − $5,500 = $24,500), to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $5,500 is her contribution limit, because $5,500 is less than $24,500 (her compensation for purposes of figuring her contribution limit).

Filing Status

Generally, except as discussed earlier under Kay Bailey Hutchison 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 2013. Because of the Kay Bailey Hutchison Spousal IRA limit rule, even though Tom earned less than $6,500, they can contribute up to $6,500 to his IRA for 2013 if they file a joint return. They can contribute up to $6,500 to Darcy's IRA. If they file separate returns, the amount that can be contributed to Tom's IRA is limited by his earned income, $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 2013. Although he can contribute up to $5,500 for 2013, he contributes only $3,000. After April 15, 2014, Rafael cannot make up the difference between his actual contributions for 2013 ($3,000) and his 2013 limit ($5,500). He cannot contribute $2,500 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 open 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.

Although property cannot be contributed, your IRA may invest in certain property. For example, your IRA may purchase shares of stock. For other restrictions on the use of funds in your IRA, see Prohibited Transactions , later in this chapter. 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 .

You can make a contribution to your IRA by having your income tax refund (or a portion of your refund), if any, paid directly to your traditional IRA, Roth IRA, or SEP IRA. For details, see the instructions for your income tax return or Form 8888, Allocation of Refund (Including Savings Bond Purchases).

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, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation. See Who Can Open 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 2013 must be made by April 15, 2014, and contributions for 2014 must be made by April 15, 2015.

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 6 calendar months after the 70th anniversary of your birth. If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year.

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. Generally, 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.

How Much Can You Deduct?

Generally, you can deduct the lesser of:

  • The contributions to your traditional IRA for the year, or

  • The general limit (or the Kay Bailey Hutchison 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 4.

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:
  • $5,500 ($6,500 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.

Kay Bailey Hutchison 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:
  1. $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older), or

  2. The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts.

    1. The IRA deduction for the year of the spouse with the greater compensation.

    2. Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation.

    3. 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 and losses on those contributions. Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans.

Example.

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, 2012. The contribution for the plan year ending on June 30, 2013, is made February 15, 2014. Because an amount is contributed to Bob's account for the plan year, Bob is covered by the plan for his 2013 tax year.

  A special rule applies to certain plans in which it is not possible to determine if an amount will be contributed to your account for a given plan year. If, for a plan year, no amounts have been allocated to your account that are attributable to employer contributions, employee contributions, or forfeitures, by the last day of the plan year, and contributions are discretionary for the plan year, you are not covered for the tax year in which the plan year ends. If, after the plan year ends, the employer makes a contribution for that plan year, you are covered for the tax year in which the contribution is made.

Example.

Mickey was covered by a profit-sharing plan and left the company on December 31, 2012. 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, 2013, no contributions were made that were allocated to the June 30, 2013, 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, 2013, the company decided to contribute to the plan for the plan year ending June 30, 2013. That contribution was made on February 15, 2014. Mickey is an active participant in the plan for his 2014 tax year but not for his 2013 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, 2012. Because Nick is eligible to participate in the plan for its year ending June 30, 2013, he is covered by the plan for his 2013 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.
  1. The plan you participate in is established for its employees by:

    1. The United States,

    2. A state or political subdivision of a state, or

    3. An instrumentality of either (a) or (b) above.

  2. 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.
  1. The plan you participate in is established for its employees by:

    1. The United States,

    2. A state or political subdivision of a state, or

    3. An instrumentality of either (a) or (b) above.

  2. 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 2013, 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 AGI1 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
$59,000 or less a full deduction.
more than $59,000 
but less than $69,000
a partial deduction.
$69,000 or more no deduction.
married filing jointly or  
qualifying widow(er)
$95,000 or less a full deduction.
more than $95,000 
but less than $115,000
a partial deduction.
$115,000 or more no deduction.
married filing separately2 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).

Table 1-3. Effect of Modified AGI1 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
$178,000 or less a full deduction.
more than $178,000 
but less than $188,000
a partial deduction.
$188,000 or more no deduction.
married filing separately with a spouse who is covered by a plan 
at work2
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.

For 2014, if you are not covered by a retirement plan at work and you are married filing jointly with a spouse who is covered by a plan at work, your deduction is phased out if your modified AGI is more than $181,000 but less than $191,000. If your AGI is $191,000 or more, you cannot take a deduction for a contribution to a traditional IRA.

Deduction Phaseout

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 2014, 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 $60,000 but less than $70,000 for a single individual (or head of household),

  • More than $96,000 but less than $116,000 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 2013 and received a distribution from your IRA in 2013, see Both contributions for 2013 and distributions in 2013 , 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 (discussed earlier) 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 savings bond interest shown on Form 8815.

This is your modified AGI.

Form 1040NR.   If you file Form 1040NR, 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.

  • Domestic production activities 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.

Income from IRA distributions.   If you received distributions in 2013 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 2013 and distributions in 2013.   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable.
  • You received distributions in 2013 from one or more traditional IRAs,

  • You made contributions to a traditional IRA for 2013, 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, later.

  If at least one of the above does not apply, figure your modified AGI using Worksheet 1-1, later.

How To Figure Your Reduced IRA Deduction

If you or your spouse is covered by an employer retirement plan and you did not receive any social security benefits, you can figure your reduced IRA deduction by using Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2013. The Instructions for Form 1040, Form 1040A, and Form 1040NR include similar worksheets that you can use instead of the worksheet in this publication.

If you or your spouse is covered by an employer retirement plan, and you received any social security benefits, see Social Security Recipients , earlier.

Note.

If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

Worksheet 1-1. Figuring Your Modified AGI

Use this worksheet to figure your modified AGI for traditional IRA purposes.

1. Enter your adjusted gross income (AGI) from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37, figured without taking into account the amount from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32 1.  
2. Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33 2.  
3. Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3.  
4. Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34 4.  
5. Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5.  
6. Enter any foreign housing deduction from Form 2555, line 50 6.  
7. Enter any excludable savings bond interest from Form 8815, line 14 7.  
8. Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8.  
9. Add lines 1 through 8. This is your Modified AGI for traditional IRA purposes 9.  

Reporting Deductible Contributions

If you file Form 1040, enter your IRA deduction on line 32 of that form. If you file Form 1040A, enter your IRA deduction on line 17 of that form. If you file Form 1040NR, enter your IRA deduction on line 32 of that form. You cannot deduct IRA contributions on Form 1040EZ or Form 1040NR-EZ.

Self-employed.   If you are self-employed (a sole proprietor or partner) and have a SIMPLE IRA, enter your deduction for allowable plan contributions on Form 1040, line 28. If you file Form 1040NR, enter your deduction on line 28 of that form.

Nondeductible Contributions

Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA of up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution.

Example.

Tony is 29 years old and single. In 2013, he was covered by a retirement plan at work. His salary is $62,000. His modified AGI is $70,000. Tony makes a $5,500 IRA contribution for 2013. Because he was covered by a retirement plan and his modified AGI is above $69,000, he cannot deduct his $5,500 IRA contribution. He must designate this contribution as a nondeductible contribution by reporting it on Form 8606.

Repayment of reservist distributions.   Nondeductible contributions may include repayments of qualified reservist distributions. For more information, see Qualified reservist repayments under How Much Can Be Contributed, earlier.

Form 8606.   To designate contributions as nondeductible, you must file Form 8606. (See the filled-in Forms 8606 in this chapter.)

  You do not have to designate a contribution as nondeductible until you file your tax return. When you file, you can even designate otherwise deductible contributions as nondeductible contributions.

  You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year.

  
A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. See Form 8606 under Distributions Fully or Partly Taxable, later.

Failure to report nondeductible contributions.   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated like deductible contributions when withdrawn. All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made.

Penalty for overstatement.   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause.

Penalty for failure to file Form 8606.   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause.

Tax on earnings on nondeductible contributions.   As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed.

Cost basis.   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions.

  
Commonly, distributions from your traditional IRAs will include both taxable and nontaxable (cost basis) amounts. See Are Distributions Taxable, later, for more information.

Recordkeeping. There is a recordkeeping worksheet, Appendix A. Summary Record of Traditional IRA(s) for 2013 , that you can use to keep a record of deductible and nondeductible IRA contributions.

Examples — Worksheet for Reduced IRA Deduction for 2013

The following examples illustrate the use of Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013.

Example 1.

For 2013, Tom and Betty file a joint return on Form 1040. They are both 39 years old. They are both employed and Tom is covered by his employer's retirement plan. Tom's salary is $59,000 and Betty's is $32,555. They each have a traditional IRA and their combined modified AGI, which includes $5,000 interest and dividend income, is $96,555. Because their modified AGI is between $95,000 and $115,000 and Tom is covered by an employer plan, Tom is subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan .

For 2013, Tom contributed $5,500 to his IRA and Betty contributed $5,500 to hers. Even though they file a joint return, they must use separate worksheets to figure the IRA deduction for each of them.

Tom can take a deduction of only $5,080.

He can choose to treat the $5,080 as either deductible or nondeductible contributions. He can either leave the $420 ($5,500 − $5,080) of nondeductible contributions in his IRA or withdraw them by April 15, 2014. He decides to treat the $5,080 as deductible contributions and leave the $420 of nondeductible contributions in his IRA.

Using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2013—Example 1 Illustrated.

Betty figures her IRA deduction as follows. Betty can treat all or part of her contributions as either deductible or nondeductible. This is because her $5,500 contribution for 2013 is not subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan . She does not need to use Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, because their modified AGI is not within the phaseout range that applies. Betty decides to treat her $5,500 IRA contributions as deductible.

The IRA deductions of $5,080 and $5,500 on the joint return for Tom and Betty total $10,580.

Example 2.

For 2013, Ed and Sue file a joint return on Form 1040. They are both 39 years old. Ed is covered by his employer's retirement plan. Ed's salary is $45,000. Sue had no compensation for the year and did not contribute to an IRA. Sue is not covered by an employer plan. Ed contributed $5,500 to his traditional IRA and $5,500 to a traditional IRA for Sue (a Kay Bailey Hutchison Spousal IRA). Their combined modified AGI, which includes $2,000 interest and dividend income and a large capital gain from the sale of stock, is $180,555.

Because the combined modified AGI is $115,000 or more, Ed cannot deduct any of the contribution to his traditional IRA. He can either leave the $5,500 of nondeductible contributions in his IRA or withdraw them by April 15, 2014.

Sue figures her IRA deduction as shown on Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2013—Example 2 Illustrated.

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2013

(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.)

Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

IF you ... AND your  
filing status is ...
AND your 
modified AGI 
is over ...
THEN enter on  
line 1 below ...
     
are covered by an employer plan single or head of household $59,000 $69,000    
married filing jointly or qualifying widow(er) $95,000 $115,000    
married filing separately $0 $10,000    
are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000    
married filing separately $0 $10,000    
1. Enter applicable amount from table above 1.  
2. Enter your modified AGI (that of both spouses, if married filing jointly) 2.  
  Note. If line 2 is equal to or more than the amount on line 1, stop here. 
Your IRA contributions are not deductible. See Nondeductible Contributions , earlier.
   
3. Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3.  
4. Multiply line 3 by the percentage below that applies to you. If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.      
 
  • Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27.5% (.275) (by 32.5% (.325) if you are age 50 or older).

  • All others, multiply line 3 by 55% (.55) (by 65% (.65) if you are age 50 or older).

Right brace
4.  
5. Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5.  
6. Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. 6.  
7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7.  
8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. 
Enter the result here and on line 1 of your Form 8606
8.  

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2013—Example 1 Illustrated

(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.)

Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

IF you ... AND your  
filing status is ...
AND your 
modified AGI 
is over ...
THEN enter on  
line 1 below ...
     
are covered by an employer plan single or head of household $59,000 $69,000    
married filing jointly or qualifying widow(er) $95,000 $115,000    
married filing separately $0 $10,000    
are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000    
married filing separately $0 $10,000    
1. Enter applicable amount from table above 1. 115,000
2. Enter your modified AGI (that of both spouses, if married filing jointly) 2. 96,555
  Note. If line 2 is equal to or more than the amount on line 1, stop here. 
Your IRA contributions are not deductible. See Nondeductible Contributions , earlier.
   
3. Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. 18,445
4. Multiply line 3 by the percentage below that applies to you. If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.      
 
  • Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27.5% (.275) (by 32.5% (.325) if you are age 50 or older).

  • All others, multiply line 3 by 55% (.55) (by 65% (.65) if you are age 50 or older).

Right brace
4. 5,080
5. Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. 59,000
6. Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. 6. 5,500
7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. 5,080
8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. 
Enter the result here and on line 1 of your Form 8606
8. 420

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2013—Example 2 Illustrated

(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.)

Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

IF you ... AND your  
filing status is ...
AND your 
modified AGI 
is over ...
THEN enter on  
line 1 below ...
     
are covered by an employer plan single or head of household $59,000 $69,000    
married filing jointly or qualifying widow(er) $95,000 $115,000    
married filing separately $0 $10,000    
are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000    
married filing separately $0 $10,000    
1. Enter applicable amount from table above 1. 188,000
2. Enter your modified AGI (that of both spouses, if married filing jointly) 2. 180,555
  Note. If line 2 is equal to or more than the amount on line 1, stop here. 
Your IRA contributions are not deductible. See Nondeductible Contributions , earlier.
   
3. Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. 7,445
4. Multiply line 3 by the percentage below that applies to you. If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.      
 
  • Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27.5% (.275) (by 32.5% (.325) if you are age 50 or older).

  • All others, multiply line 3 by 55% (.55) (by 65% (.65) if you are age 50 or older).

Right brace
4. 4,100
5. Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. 39,500
6. Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. 6. 5,500
7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. 4,100
8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. 
Enter the result here and on line 1 of your Form 8606
8. 1,400

What if You Inherit an IRA?

If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive.

Inherited from spouse.   If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:
  1. Treat it as your own IRA by designating yourself as the account owner.

  2. Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a:

    1. Qualified employer plan,

    2. Qualified employee annuity plan (section 403(a) plan),

    3. Tax-sheltered annuity plan (section 403(b) plan),

    4. Deferred compensation plan of a state or local government (section 457 plan), or

  3. Treat yourself as the beneficiary rather than treating the IRA as your own.

Treating it as your own.   You will be considered to have chosen to treat the IRA as your own if:
  • Contributions (including rollover contributions) are made to the inherited IRA, or

  • You do not take the required minimum distribution for a year as a beneficiary of the IRA.

You will only be considered to have chosen to treat the IRA as your own if:
  • You are the sole beneficiary of the IRA, and

  • You have an unlimited right to withdraw amounts from it.

  However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. For more information, see When Must You Withdraw Assets? (Required Minimum Distributions) , later.

Inherited from someone other than spouse.   If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

  Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

IRA with basis.   If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

Federal estate tax deduction.   A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. The beneficiary can deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year the income is reported. For information on claiming this deduction, see Estate Tax Deduction under Other Tax Information in Publication 559, Survivors, Executors, and Administrators.

  Any taxable part of a distribution that is not income in respect of a decedent is a payment the beneficiary must include in income. However, the beneficiary cannot take any estate tax deduction for this part.

  A surviving spouse can roll over the distribution to another traditional IRA and avoid including it in income for the year received.

More information.   For more information about rollovers, required distributions, and inherited IRAs, see:

Can You Move Retirement Plan Assets?

You can transfer, tax free, assets (money or property) from other retirement programs (including traditional IRAs) to a traditional IRA. You can make the following kinds of transfers.

  • Transfers from one trustee to another.

  • Rollovers.

  • Transfers incident to a divorce.

This chapter discusses all three kinds of transfers.

Transfers to Roth IRAs.   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. For more information about these transfers, see Converting From Any Traditional IRA Into a Roth IRA , later in this chapter, and Can You Move Amounts Into a Roth IRA? in chapter 2.

Transfers to Roth IRAs from other retirement plans.   Under certain conditions, you can move assets from a qualified retirement plan to a Roth IRA. For more information, see Can You Move Amounts Into a Roth IRA? in chapter 2.

Trustee-to-Trustee Transfer

A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers. This waiting period is discussed later under Rollover From One IRA Into Another .

For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option , later.

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.

Note.

An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan.

Kinds of rollovers to a traditional IRA.   You can roll over amounts from the following plans into a traditional IRA:
  • A traditional IRA,

  • An employer's qualified retirement plan for its employees,

  • A deferred compensation plan of a state or local government (section 457 plan), or

  • A tax-sheltered annuity plan (section 403 plan).

Also, see Table 1-4 above.

Table 1-4. Rollover Chart

The following chart indicates the rollovers that are permitted between various types of plans.

Roll To
    Roth IRA Traditional 
IRA
SIMPLE 
IRA
SEP IRA 457(b) Plan Qualified Plan1 
(pre-tax)
403(b) Plan 
(pre-tax)
Designated Roth Account (401(k), 403(b) or 457(b)2)
  Roth IRA Yes No No No No No No No
  Traditional IRA Yes3 Yes No Yes Yes4 Yes Yes No
  SIMPLE IRA Yes3, after 2 years Yes, after 2 years Yes Yes, after 2 years Yes4, after 2 years Yes, after 2 years Yes, after 2 years No
  SEP IRA Yes3 Yes No Yes Yes4 Yes Yes No
  457(b) Plan Yes3 Yes No Yes Yes Yes Yes Yes,3, 5 after 12/31/10
Roll From Qualified Plan1 
(pre-tax)
Yes3 Yes No Yes Yes4 Yes Yes Yes,3, 5 after 9/27/10
  403(b) Plan 
(pre-tax)
Yes3 Yes No Yes Yes4 Yes Yes Yes,3, 5 after 9/27/10
  Designated Roth Account (401(k), 403(b) or 457(b)2) Yes No No No No No No Yes, if a direct trustee-to- trustee  
transfer
1Qualified plans include, for example, profit-sharing, 401(k), money purchase, and defined benefit plans. 
2Governmental 457(b) plans, after December 31, 2010. 
3Must include in income. 
4Must have separate accounts. 
5Must be an in-plan rollover.
Treatment of rollovers.   You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and Reporting rollovers from employer plans .

Rollover notice.   A written explanation of rollover treatment must be given to you by the plan (other than an IRA) making the distribution. See Written explanation to recipients , later, for more details.

Kinds of rollovers from a traditional IRA.   You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA.   Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

Eligible retirement plans.   The following are considered eligible retirement plans.
  • Individual retirement arrangements (IRAs).

  • Qualified trusts.

  • Qualified employee annuity plans under section 403(a).

  • Deferred compensation plans of state and local governments (section 457 plans).

  • Tax-sheltered annuities (section 403(b) annuities).

Time Limit for Making a Rollover Contribution

You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan.

Example.

You received an eligible rollover distribution from your traditional IRA on June 30, 2013, that you intend to roll over to your 403(b) plan. To postpone including the distribution in your income, you must complete the rollover by August 29, 2013, the 60th day following June 30.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. For exceptions to the 60-day period, see Automatic waiver , Other waivers , and Extension of rollover period , later.

Rollovers completed after the 60-day period.   In the absence of a waiver, amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer's plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% additional tax on early distributions as discussed later under Early Distributions .

  Unless there is a waiver or an extension of the 60-day rollover period, any contribution you make to your IRA more than 60 days after the distribution is a regular contribution, not a rollover contribution.

Example.

You received a distribution in late December 2013 from a traditional IRA that you do not roll over into another traditional IRA within the 60-day limit. You do not qualify for a waiver. This distribution is taxable in 2013 even though the 60-day limit was not up until 2014.

Automatic waiver.   The 60-day rollover requirement is waived automatically only if all of the following apply.
  • The financial institution receives the funds on your behalf before the end of the 60-day rollover period.

  • You followed all the procedures set by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan).

  • The funds are not deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution.

  • The funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period.

  • It would have been a valid rollover if the financial institution had deposited the funds as instructed.

Other waivers.   If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement. To apply for a waiver, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. This revenue procedure is generally published in the first Internal Revenue Bulletin of the year. You must also pay a user fee with the application.

  In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including:
  • Whether errors were made by the financial institution (other than those described under Automatic waiver above),

  • Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error,

  • Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check), and

  • How much time has passed since the date of distribution.

Amount.   The rules regarding the amount that can be rolled over within the 60-day time period also apply to the amount that can be deposited due to a waiver. For example, if you received $6,000 from your IRA, the most that you can deposit into an eligible retirement plan due to a waiver is $6,000.

Extension of rollover period.   If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, two special rules extend the rollover period.
  • The period during which the amount is a frozen deposit is not counted in the 60-day period.

  • The 60-day period cannot end earlier than 10 days after the deposit is no longer frozen.

Frozen deposit.   This is any deposit that cannot be withdrawn from a financial institution because of either of the following reasons.
  • The financial institution is bankrupt or insolvent.

  • The state where the institution is located restricts withdrawals because one or more financial institutions in the state are (or are about to be) bankrupt or insolvent.

Rollover From One IRA Into Another

You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA.

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. See Recharacterizations in this chapter for more information.

Waiting period between rollovers.   Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

  The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.

Example.

You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.

However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.

Exception.   There is an exception to the rule that amounts rolled over tax free into an IRA cannot be rolled over tax free again within the 1-year period beginning on the date of the original distribution. The exception applies to a distribution that meets all three of the following requirements.
  1. It is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution.

  2. It was not initiated by either the custodial institution or the depositor.

  3. It was made because:

    1. The custodial institution is insolvent, and

    2. The receiver is unable to find a buyer for the institution.

The same property must be rolled over.   If property is distributed to you from an IRA and you complete the rollover by contributing property to an IRA, your rollover is tax free only if the property you contribute is the same property that was distributed to you.

Partial rollovers.   If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). The amount you keep may be subject to the 10% additional tax on early distributions discussed later under What Acts Result in Penalties or Additional Taxes .

Required distributions.   Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment.

Inherited IRAs.   If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own as discussed earlier under What if You Inherit an IRA .

Not inherited from spouse.   If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. You must withdraw the IRA assets within a certain period. For more information, see When Must You Withdraw Assets? (Required Minimum Distributions) , later.

Rollover of required distributions not allowed.   If the owner had a required distribution in the year of his or her death, you cannot roll over such distribution. If you do not treat the IRA as your own, you cannot roll over any of the required distributions in years after your deceased spouse's death. Any rollover contributions you make to your own IRA of these required distributions are subject to the 6% tax discussed in Tax on Excess Contributions , later.

  For more information on distribution rules after the owner's death, see IRA Beneficiaries , later.

Reporting rollovers from IRAs.   Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 15a and 15b; Form 1040A, lines 11a and 11b; or Form 1040NR, lines 16a and 16b.

  Enter the total amount of the distribution on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, was rolled over, enter zero on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Put “Rollover” next to line 15b, Form 1040; line 11b, Form 1040A; or line 16b, Form 1040NR. See your tax return instructions.

  If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2014, attach a statement explaining what you did.

  For information on how to figure the taxable portion, see Are Distributions Taxable , later.

Rollover From Employer's Plan Into an IRA

You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):

  • Employer's qualified pension, profit-sharing, or stock bonus plan;

  • Annuity plan;

  • Tax-sheltered annuity plan (section 403(b) plan); or

  • Governmental deferred compensation plan (section 457 plan).

A qualified plan is one that meets the requirements of the Internal Revenue Code.

Eligible rollover distribution.   Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following.
  1. A required minimum distribution (explained later under When Must You Withdraw Assets? (Required Minimum Distributions) ).

  2. A hardship distribution.

  3. Any of a series of substantially equal periodic distributions paid at least once a year over:

    1. Your lifetime or life expectancy,

    2. The lifetimes or life expectancies of you and your beneficiary, or

    3. A period of 10 years or more.

  4. Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains.

  5. A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan.

  6. Dividends on employer securities.

  7. The cost of life insurance coverage.

  Your rollover into a traditional IRA may include both amounts that would be taxable and amounts that would not be taxable if they were distributed to you, but not rolled over. To the extent the distribution is rolled over into a traditional IRA, it is not includible in your income.

Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. See Form 8606 under Distributions Fully or Partly Taxable, later.

Rollover by nonspouse beneficiary.   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you can roll over all or part of an eligible rollover distribution from one of the types of plans listed above into a traditional IRA. You must make the rollover by a direct trustee-to-trustee transfer into an inherited IRA.

  You will determine your required minimum distributions in years after you make the rollover based on whether the employee died before his or her required beginning date for taking distributions from the plan. For more information, see Distributions after the employee's death under Tax on Excess Accumulation in Publication 575.

Written explanation to recipients.   Before making an eligible rollover distribution, the administrator of a qualified retirement plan must provide you with a written explanation. It must tell you about all of the following.
  • Your right to have the distribution paid tax free directly to a traditional IRA or another eligible retirement plan.

  • The requirement to withhold tax from the distribution if it is not paid directly to a traditional IRA or another eligible retirement plan.

  • The tax treatment of any part of the distribution that you roll over to a traditional IRA or another eligible retirement plan within 60 days after you receive the distribution.

  • Other qualified retirement plan rules, if they apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.

  • How the plan receiving the distribution differs from the plan making the distribution in its restrictions and tax consequences.

  The plan administrator must provide you with this written explanation no earlier than 90 days and no later than 30 days before the distribution is made.

  However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as both of the following requirements are met.
  • You are given at least 30 days after the notice is provided to consider whether you want to elect a direct rollover.

  • You are given information that clearly states that you have this 30-day period to make the decision.

Contact the plan administrator if you have any questions regarding this information.

Withholding requirement.   Generally, if an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA. You can avoid withholding by choosing the direct rollover option, discussed later.

Exceptions.   The payer does not have to withhold from an eligible rollover distribution paid to you if either of the following conditions apply.
  • The distribution and all previous eligible rollover distributions you received during your tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200.

  • The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.

The amount withheld is part of the distribution. If you roll over less than the full amount of the distribution, you may have to include in your income the amount you do not roll over. However, you can make up the amount withheld with funds from other sources.

Other withholding rules.   The 20% withholding requirement does not apply to distributions that are not eligible rollover distributions. However, other withholding rules apply to these distributions. The rules that apply depend on whether the distribution is a periodic distribution or a nonperiodic distribution. For either of these types of distributions, you can still choose not to have tax withheld. For more information, see Publication 575.

Direct rollover option.   Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a traditional IRA. The plan is not required to give you this option if your eligible rollover distributions are expected to total less than $200 for the year.

Withholding.   If you choose the direct rollover option, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the traditional IRA.

  If any part is paid to you, the payer must withhold 20% of that part's taxable amount.

Choosing an option.    Table 1-5 next may help you decide which distribution option to choose. Carefully compare the effects of each option.

Table 1-5. Comparison of Payment to You Versus Direct Rollover

Affected item Result of a payment to you Result of a 
direct rollover
withholding The payer must withhold 20% of the taxable part. There is no withholding.
additional tax If you are under age 59½, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that is not rolled over. There is no 10% additional tax. See Early Distributions , later.
when to report 
as income
Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid. Any taxable part is not income to you until later distributed to you from the IRA.

If you decide to roll over any part of a distribution, the direct rollover option will generally be to your advantage. This is because you will not have 20% withholding or be subject to the 10% additional tax under that option.

If you have a lump-sum distribution and do not plan to roll over any part of it, the distribution may be eligible for special tax treatment that could lower your tax for the distribution year. In that case, you may want to see Publication 575 and Form 4972, Tax on Lump-Sum Distributions, and its instructions to determine whether your distribution qualifies for special tax treatment and, if so, to figure your tax under the special methods.

You can then compare any advantages from using Form 4972 to figure your tax on the lump-sum distribution with any advantages from rolling over all or part of the distribution. However, if you roll over any part of the lump-sum distribution, you cannot use the Form 4972 special tax treatment for any part of the distribution.

Contributions you made to your employer's plan.   You can roll over a distribution of voluntary deductible employee contributions (DECs) you made to your employer's plan. Prior to January 1, 1987, employees could make and deduct these contributions to certain qualified employers' plans and government plans. These are not the same as an employee's elective contributions to a 401(k) plan, which are not deductible by the employee.

  If you receive a distribution from your employer's qualified plan of any part of the balance of your DECs and the earnings from them, you can roll over any part of the distribution.

No waiting period between rollovers.   The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. You can roll over more than one distribution from the same employer plan within a year.

IRA as a holding account (conduit IRA) for rollovers to other eligible plans.   If you receive an eligible rollover distribution from your employer's plan, you can roll over part or all of it into one or more conduit IRAs. You can later roll over those assets into a new employer's plan. You can use a traditional IRA as a conduit IRA. You can roll over part or all of the conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer's plan. However, if you make regular contributions to the conduit IRA or add funds from other sources, the qualified plan into which you move funds will not be eligible for any optional tax treatment for which it might have otherwise qualified.

Property and cash received in a distribution.   If you receive both property and cash in an eligible rollover distribution, you can roll over part or all of the property, part or all of the cash, or any combination of the two that you choose.

The same property (or sales proceeds) must be rolled over.   If you receive property in an eligible rollover distribution from a qualified retirement plan, you cannot keep the property and contribute cash to a traditional IRA in place of the property. You must either roll over the property or sell it and roll over the proceeds, as explained next.

Sale of property received in a distribution from a qualified plan.   Instead of rolling over a distribution of property other than cash, you can sell all or part of the property and roll over the amount you receive from the sale (the proceeds) into a traditional IRA. You cannot keep the property and substitute your own funds for property you received.

Example.

You receive a total distribution from your employer's plan consisting of $10,000 cash and $15,000 worth of property. You decide to keep the property. You can roll over to a traditional IRA the $10,000 cash received, but you cannot roll over an additional $15,000 representing the value of the property you choose not to sell.

Treatment of gain or loss.   If you sell the distributed property and roll over all the proceeds into a traditional IRA, no gain or loss is recognized. The sale proceeds (including any increase in value) are treated as part of the distribution and are not included in your gross income.

Example.

On September 6, Mike received a lump-sum distribution from his employer's retirement plan of $50,000 in cash and $50,000 in stock. The stock was not stock of his employer. On September 24, he sold the stock for $60,000. On October 6, he rolled over $110,000 in cash ($50,000 from the original distribution and $60,000 from the sale of stock). Mike does not include the $10,000 gain from the sale of stock as part of his income because he rolled over the entire amount into a traditional IRA.

Note.

Special rules may apply to distributions of employer securities. For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575.

Partial rollover.   If you received both cash and property, or just property, but did not roll over the entire distribution, see Rollovers in Publication 575.

Life insurance contract.   You cannot roll over a life insurance contract from a qualified plan into a traditional IRA.

Distributions received by a surviving spouse.   If you receive an eligible rollover distribution (defined earlier) from your deceased spouse's eligible retirement plan (defined earlier), you can roll over part or all of it into a traditional IRA. You can also roll over all or any part of a distribution of deductible employee contributions (DECs).

Distributions under divorce or similar proceedings (alternate payees).   If you are the spouse or former spouse of an employee and you receive a distribution from a qualified retirement plan as a result of divorce or similar proceedings, you may be able to roll over all or part of it into a traditional IRA. To qualify, the distribution must be:
  • One that would have been an eligible rollover distribution (defined earlier) if it had been made to the employee, and

  • Made under a qualified domestic relations order.

Qualified domestic relations order.   A domestic relations order is a judgment, decree, or order (including approval of a property settlement agreement) that is issued under the domestic relations law of a state. A “qualified domestic relations order” gives to an alternate payee (a spouse, former spouse, child, or dependent of a participant in a retirement plan) the right to receive all or part of the benefits that would be payable to a participant under the plan. The order requires certain specific information, and it cannot alter the amount or form of the benefits of the plan.

Tax treatment if all of an eligible distribution is not rolled over.   Any part of an eligible rollover distribution that you keep is taxable in the year you receive it. If you do not roll over any of it, special rules for lump-sum distributions may apply. See Lump-Sum Distributions under Taxation of Nonperiodic Payments in Publication 575. The 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes , does not apply.

Keogh plans and rollovers.   If you are self-employed, you are generally treated as an employee for rollover purposes. Consequently, if you receive an eligible rollover distribution from a Keogh plan (a qualified plan with at least one self-employed participant), you can roll over all or part of the distribution (including a lump-sum distribution) into a traditional IRA. For information on lump-sum distributions, see Lump-Sum Distributions under Taxation of Nonperiodic Payments in Publication 575.

More information.   For more information about Keogh plans, see chapter 4 of Publication 560.

Distribution from a tax-sheltered annuity.   If you receive an eligible rollover distribution from a tax-sheltered annuity plan (section 403(b) plan), you can roll it over into a traditional IRA.

Receipt of property other than money.   If you receive property other than money, you can sell the property and roll over the proceeds as discussed earlier.

Rollover from bond purchase plan.   If you redeem retirement bonds that were distributed to you under a qualified bond purchase plan, you can roll over tax free into a traditional IRA the part of the amount you receive that is more than your basis in the retirement bonds.

Reporting rollovers from employer plans.    Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Also, enter "Rollover" next to line 16b on Form 1040; line 12b of Form 1040A; or line 17b of Form 1040NR.

Rollover of Exxon Valdez Settlement Income

If you are a qualified taxpayer (defined next) and you received qualified settlement income (defined below), you can contribute all or part of the amount received to an eligible retirement plan which includes a traditional IRA. The amount contributed cannot exceed $100,000 (reduced by the amount of qualified settlement income contributed to an eligible retirement plan in prior tax years) or the amount of qualified settlement income received during the tax year. Contributions for the year can be made until the due date for filing your return, not including extensions.

Qualified settlement income that you contribute to a traditional IRA will be treated as having been rolled over in a direct trustee-to-trustee transfer within 60 days of the distribution. The amount contributed is not included in your income at the time of the contributions and is not considered to be investment in the contract. Also, the 1-year waiting period between rollovers does not apply.

Qualified taxpayer.   You are a qualified taxpayer if you are:
  • A plaintiff in the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska), or

  • The beneficiary of the estate of a plaintiff who acquired the right to receive qualified settlement income and who is the spouse or immediate relative of that plaintiff.

Qualified settlement income.   Qualified settlement income is any interest and punitive damage awards which are:
  • Otherwise includible in income, and

  • Received in connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska) (whether pre- or post-judgment and whether related to a settlement or judgment).

Qualified settlement income can be received as periodic payments or as a lump sum. See Miscellaneous Income in Publication 525, Taxable and Nontaxable Income, for information on how to report qualified settlement income.

Transfers Incident To Divorce

If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free. For information about transfers of interests in employer plans, see Distributions under divorce or similar proceedings (alternate payees) under Rollover From Employer's Plan Into an IRA, earlier.

Transfer methods.   There are two commonly used methods of transferring IRA assets to a spouse or former spouse. The methods are:
  • Changing the name on the IRA, and

  • Making a direct transfer of IRA assets.

Changing the name on the IRA.   If all the assets are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse.

Direct transfer.   Under this method, you direct the trustee of the traditional IRA to transfer the affected assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse.

  If your spouse or former spouse is allowed to keep his or her portion of the IRA assets in your existing IRA, you can direct the trustee to transfer the assets you are permitted to keep directly to a new or existing traditional IRA set up in your name. The name on the IRA containing your spouse's or former spouse's portion of the assets would then be changed to show his or her ownership.

If the transfer results in a change in the basis of the traditional IRA of either spouse, both spouses must file Form 8606 and follow the directions in the instructions for that form.

Converting From Any Traditional IRA Into a Roth IRA

Allowable conversions.   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.

  You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early distributions. See When Can You Withdraw or Use Assets , later, for more information on distributions from traditional IRAs and Early Distributions , later, for more information on the tax on early distributions.

Periodic distributions.   If you started taking substantially equal periodic payments from a traditional IRA, you can convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments. The 10% additional tax on early distributions will not apply even if the distributions are not qualified distributions (as long as they are part of a series of substantially equal periodic payments).

Required distributions.   You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70½) under the required distribution rules (discussed later in this chapter).

Income.   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA.

  You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed under Are Distributions Taxable , later in this chapter.

If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Recharacterizations

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.

To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the tax year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you recharacterize your contribution, you must do all three of the following.

  • Include in the transfer any net income allocable to the contribution. If there was a loss, the net income you must transfer may be a negative amount.

  • Report the recharacterization on your tax return for the year during which the contribution was made.

  • Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.

No deduction allowed.   You cannot deduct the contribution to the first IRA. Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. The contribution will not be treated as having been made to the second IRA to the extent any deduction was allowed for the contribution to the first IRA.

Conversion by rollover from traditional to Roth IRA.   For recharacterization purposes, if you receive a distribution from a traditional IRA in one tax year and roll it over into a Roth IRA in the next year, but still within 60 days of the distribution from the traditional IRA, treat it as a contribution to the Roth IRA in the year of the distribution from the traditional IRA.

Effect of previous tax-free transfers.   If an amount has been moved from one IRA to another in a tax-free transfer, such as a rollover, you generally cannot recharacterize the amount that was transferred. However, see Traditional IRA mistakenly moved to SIMPLE IRA below.

Recharacterizing to a SEP IRA or SIMPLE IRA.   Roth IRA conversion contributions from a SEP IRA or SIMPLE IRA can be recharacterized to a SEP IRA or SIMPLE IRA (including the original SEP IRA or SIMPLE IRA).

Traditional IRA mistakenly moved to SIMPLE IRA.   If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA.

Recharacterizing excess contributions.   You can recharacterize only actual contributions. If you are applying excess contributions for prior years as current contributions, you can recharacterize them only if the recharacterization would still be timely with respect to the tax year for which the applied contributions were actually made.

Example.

You contributed more than you were entitled to in 2013. You cannot recharacterize the excess contributions you made in 2013 after April 15, 2014, because contributions after that date are no longer timely for 2013.

Recharacterizing employer contributions.   You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. SEPs are discussed in chapter 2 of Publication 560. SIMPLE plans are discussed in chapter 3.

Recharacterization not counted as rollover.   The recharacterization of a contribution is not treated as a rollover for purposes of the 1-year waiting period described earlier in this chapter under Rollover From One IRA Into Another . This is true even if the contribution would have been treated as a rollover contribution by the second IRA if it had been made directly to the second IRA rather than as a result of a recharacterization of a contribution to the first IRA.

Reconversions

You cannot convert and reconvert an amount during the same tax year or, if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion.

Example.

If you convert an amount from a traditional IRA to a Roth IRA and then transfer that amount back to a traditional IRA in a recharacterization in the same year, you may not reconvert that amount from the traditional IRA to a Roth IRA before:

  • The beginning of the year following the year in which the amount was converted to a Roth IRA or, if later,

  • The end of the 30-day period beginning on the day on which you transfer the amount from the Roth IRA back to a traditional IRA in a recharacterization.

How Do You Recharacterize a Contribution?

To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information.

  • The type and amount of the contribution to the first IRA that is to be recharacterized.

  • The date on which the contribution was made to the first IRA and the year for which it was made.

  • A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA.

  • The name of the trustee of the first IRA and the name of the trustee of the second IRA.

  • Any additional information needed to make the transfer.

In most cases, the net income you must transfer is determined by your IRA trustee or custodian. If you need to determine the applicable net income on IRA contributions made after 2013 that are recharacterized, use Worksheet 1-3 above. See Regulations section 1.408A-5 for more information.

Worksheet 1-3. Determining the Amount of Net Income Due To an IRA Contribution and Total Amount To Be Recharacterized

1. Enter the amount of your IRA contribution for 2014 to be recharacterized 1.  
2. Enter the fair market value of the IRA immediately prior to the recharacterization (include any distributions, transfers, or recharacterization made while the contribution was in the account) 2.  
3. Enter the fair market value of the IRA immediately prior to the time the contribution being recharacterized was made, including the amount of such contribution and any other contributions, transfers, or recharacterizations made while the contribution was in the account 3.  
4. Subtract line 3 from line 2 4.  
5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places) 5.  
6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be recharacterized 6.  
7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be recharacterized 7.  

Example.

On April 1, 2014, when her Roth IRA is worth $80,000, Allison makes a $160,000 conversion contribution to the Roth IRA. Subsequently, Allison requests that the $160,000 be recharacterized to a traditional IRA. Pursuant to this request, on April 1, 2015, when the IRA is worth $225,000, the Roth IRA trustee transfers to a traditional IRA the $160,000 plus allocable net income. No other contributions have been made to the Roth IRA and no distributions have been made.

The adjusted opening balance is $240,000 ($80,000 + $160,000) and the adjusted closing balance is $225,000. Thus the net income allocable to the $160,000 is ($10,000). See lines 1 through 6 of Worksheet 1-3. Example—Illustrated, later, for the calculation. Therefore, in order to recharacterize the April 1, 2014, $160,000 conversion contribution on April 1, 2015, the Roth IRA trustee must transfer from Allison's Roth IRA to her traditional IRA $150,000 ($160,000 – $10,000). This is shown on line 7 of Worksheet 1-3. Example—Illustrated, later.

Timing.   The election to recharacterize and the transfer must both take place on or before the due date (including extensions) for filing your tax return for the tax year for which the contribution was made to the first IRA.

Worksheet 1-3. Example—Illustrated

1. Enter the amount of your IRA contribution for 2014 to be recharacterized 1. 160,000
2. Enter the fair market value of the IRA immediately prior to the recharacterization (include any distributions, transfers, or recharacterization made while the contribution was in the account) 2. 225,000
3. Enter the fair market value of the IRA immediately prior to the time the contribution being recharacterized was made, including the amount of such contribution and any other contributions, transfers, or recharacterizations made while the contribution was in the account 3. 240,000
4. Subtract line 3 from line 2 4. (15,000)
5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places) 5. (.0625)
6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be recharacterized 6. (10,000)
7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be recharacterized 7. 150,000
Extension.   Ordinarily you must choose to recharacterize a contribution by the due date of the return or the due date plus extensions. However, if you miss this deadline, you can still recharacterize a contribution if:
  • Your return was timely filed for the year the choice should have been made, and

  • You take appropriate corrective action within 6 months from the due date of your return excluding extensions. For returns due April 15, 2014, this period ends on October 15, 2014. When the date for doing any act for tax purposes falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

  Appropriate corrective action consists of:
  • Notifying the trustee(s) of your intent to recharacterize,

  • Providing the trustee with all necessary information, and

  • Having the trustee transfer the contribution.

Once this is done, you must amend your return to show the recharacterization. You have until the regular due date for amending a return to do this. Report the recharacterization on the amended return and write “Filed pursuant to section 301.9100-2” on the return. File the amended return at the same address you filed the original return.

Decedent.   The election to recharacterize can be made on behalf of a deceased IRA owner by the executor, administrator, or other person responsible for filing the decedent's final income tax return.

Election cannot be changed.   After the transfer has taken place, you cannot change your election to recharacterize.

Same trustee.   Recharacterizations made with the same trustee can be made by redesignating the first IRA as the second IRA, rather than transferring the account balance.

Reporting a Recharacterization

If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. You must treat the contribution as having been made to the second IRA.

Example.

On June 1, 2013, Christine properly and timely converted her traditional IRA to a Roth IRA. In December, Christine decided to recharacterize the conversion and move the funds to a traditional IRA. In January 2014, to make the necessary adjustment to remove the conversion, Christine opened a traditional IRA with the same trustee. Also in January 2014, she instructed the trustee of the Roth IRA to make a trustee-to-trustee transfer of the conversion contribution made to the Roth IRA (including net income allocable to it since the conversion) to the new traditional IRA. She also notified the trustee that she was electing to recharacterize the contribution to the Roth IRA and treat it as if it had been contributed to the new traditional IRA. Because of the recharacterization, Christine has no taxable income from the conversion to report for 2013, and the resulting rollover to a traditional IRA is not treated as a rollover for purposes of the one-rollover-per-year rule.

More than one IRA.   If you have more than one IRA, figure the amount to be recharacterized only on the account from which you withdraw the contribution.

When Can You Withdraw or Use Assets?

You can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you are age 59½. This is explained under Age 59½ Rule under Early Distributions, later.

You generally can make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them. This means that, even if you are under age 59½, the 10% additional tax may not apply. These withdrawals are explained next.

Contributions Returned Before Due Date of Return

If you made IRA contributions in 2013, you can withdraw them tax free by the due date of your return. If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this if, for each contribution you withdraw, both of the following conditions apply.

  • You did not take a deduction for the contribution.

  • You withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income earned on the contribution may be a negative amount.

Note.

If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).

In most cases, the net income you must withdraw is determined by the IRA trustee or custodian. If you need to determine the applicable net income on IRA contributions made after 2013 that are returned to you, use Worksheet 1-4 above. See Regulations section 1.408-11 for more information.

Worksheet 1-4. Determining the Amount of Net Income Due To an IRA Contribution and Total Amount To Be Withdrawn From the IRA

1. Enter the amount of your IRA contribution for 2014 to be returned to you 1.  
2. Enter the fair market value of the IRA immediately prior to the removal of the contribution, plus the amount of any distributions, transfers, and recharacterizations made while the contribution was in the IRA 2.  
3. Enter the fair market value of the IRA immediately before the contribution was made, plus the amount of such contribution and any other contributions, transfers, and recharacterizations made while the contribution was in the IRA 3.  
4. Subtract line 3 from line 2 4.  
5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places) 5.  
6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be returned 6.  
7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be returned to you 7.  

Example.

On May 2, 2014, when her IRA is worth $4,800, Cathy makes a $1,600 regular contribution to her IRA. Cathy requests that $400 of the May 2, 2014 contribution be returned to her. On February 2, 2015, when the IRA is worth $7,600, the IRA trustee distributes to Cathy the $400 plus net income attributable to the contribution. No other contributions have been made to the IRA for 2014 and no distributions have been made.

The adjusted opening balance is $6,400 ($4,800 + $1,600) and the adjusted closing balance is $7,600. The net income due to the May 2, 2014, contribution is $75 ($400 x ($7,600 – $6,400) ÷ $6,400). Therefore, the total to be distributed on February 2, 2015, is $475. This is shown on Worksheet 1-4. Example—Illustrated, later.

Worksheet 1-4. Example—Illustrated

1. Enter the amount of your IRA contribution for 2014 to be returned to you 1. 400
2. Enter the fair market value of the IRA immediately prior to the removal of the contribution, plus the amount of any distributions, transfers, and recharacterizations made while the contribution was in the IRA 2. 7,600
3. Enter the fair market value of the IRA immediately before the contribution was made, plus the amount of such contribution and any other contributions, transfers, and recharacterizations made while the contribution was in the IRA 3. 6,400
4. Subtract line 3 from line 2 4. 1,200
5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places) 5. .1875
6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be returned 6. 75
7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be returned to you 7. 475

Last-in first-out rule.   If you made more than one regular contribution for the year, your last contribution is considered to be the one that is returned to you first.

Earnings Includible in Income

You must include in income any earnings on the contributions you withdraw. Include the earnings in income for the year in which you made the contributions, not the year in which you withdraw them.

Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes, later.

Early Distributions Tax

The 10% additional tax on distributions made before you reach age 59½ does not apply to these tax-free withdrawals of your contributions. However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59½ rule, it will be subject to this tax. See Early Distributions under What Acts Result in Penalties or Additional Taxes, later.

Excess Contributions Tax

If any part of these contributions is an excess contribution for 2012, it is subject to a 6% excise tax. You will not have to pay the 6% tax if any 2012 excess contribution was withdrawn by April 15, 2013 (plus extensions), and if any 2013 excess contribution is withdrawn by April 15, 2014 (plus extensions). See Excess Contributions under What Acts Result in Penalties or Additional Taxes, later.

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. See Recharacterizations, earlier, for more information.

When Must You Withdraw Assets? (Required Minimum Distributions)

You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. See Excess Accumulations (Insufficient Distributions) , later under What Acts Result in Penalties or Additional Taxes. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent's IRA.

Required minimum distribution.   The amount that must be distributed each year is referred to as the required minimum distribution.

Distributions not eligible for rollover.   Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment.

Note.

A qualified charitable distribution will count towards your required minimum distribution. See Qualified charitable distributions under Are Distributions Taxable, later.

IRA Owners

If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date.

Distributions by the required beginning date.   You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year.

  If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.

Even if you begin receiving distributions before you reach age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date.

More than minimum received.   If, in any year, you receive more than the required minimum distribution for that year, you will not receive credit for the additional amount when determining the minimum required distributions for future years. This does not mean that you do not reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you cannot treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year.

Distributions after the required beginning date.   The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year.

Example.

You reach age 70½ on August 20, 2013. For 2013, you must receive the required minimum distribution from your IRA by April 1, 2014. You must receive the required minimum distribution for 2014 by December 31, 2014.

If you do not receive your required minimum distribution for 2013 until 2014, both your 2013 and your 2014 distributions will be included in income on your 2014 return.

Distributions from individual retirement account.   If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year. See Figuring the Owner's Required Minimum Distribution below.

Distributions from individual retirement annuities.   If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution. For more information on rules for annuities, see Regulations section 1.401(a)(9)-6. These regulations can be read in many libraries, IRS offices, and online at IRS.gov.

Change in marital status.   For purposes of figuring your required minimum distribution, your marital status is determined as of January 1 of each year. If your spouse is a beneficiary of your IRA on January 1, he or she remains a beneficiary for the entire year even if you get divorced or your spouse dies during the year. For purposes of determining your distribution period, a change in beneficiary is effective in the year following the year of death or divorce.

Change of beneficiary.   If your spouse is the sole beneficiary of your IRA, and he or she dies before you, your spouse will not fail to be your sole beneficiary for the year that he or she died solely because someone other than your spouse is named a beneficiary for the rest of that year. However, if you get divorced during the year and change the beneficiary designation on the IRA during that same year, your former spouse will not be treated as the sole beneficiary for that year.

Figuring the Owner's Required Minimum Distribution

Figure your required minimum distribution for each year by dividing the IRA account balance (defined next) as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy. Tables showing distribution periods and life expectancies are found in Appendix C and are discussed later.

IRA account balance.   The IRA account balance is the amount in the IRA at the end of the year preceding the year for which the required minimum distribution is being figured.

Contributions.   Contributions increase the account balance in the year they are made. If a contribution for last year is not made until after December 31 of last year, it increases the account balance for this year, but not for last year. Disregard contributions made after December 31 of last year in determining your required minimum distribution for this year.

Outstanding rollovers and recharacterizations.   The IRA account balance is adjusted by outstanding rollovers and recharacterizations of Roth IRA conversions that are not in any account at the end of the preceding year.

  For a rollover from a qualified plan or another IRA that was not in any account at the end of the preceding year, increase the account balance of the receiving IRA by the rollover amount valued as of the date of receipt.

  If a conversion contribution is contributed to a Roth IRA and that amount (plus net income allocable to it) is transferred to another IRA in a subsequent year as a recharacterized contribution, increase the account balance of the receiving IRA by the recharacterized contribution (plus allocable net income) for the year in which the conversion occurred.

Distributions.   Distributions reduce the account balance in the year they are made. A distribution for last year made after December 31 of last year reduces the account balance for this year, but not for last year. Disregard distributions made after December 31 of last year in determining your required minimum distribution for this year.

Example 1.

Laura was born on October 1, 1942. She reaches age 70½ in 2013. Her required beginning date is April 1, 2014. As of December 31, 2012, her IRA account balance was $26,500. No rollover or recharacterization amounts were outstanding. Using Table III in Appendix C, the applicable distribution period for someone her age (71) is 26.5 years. Her required minimum distribution for 2013 is $1,000 ($26,500 ÷ 26.5). That amount is distributed to her on April 1, 2014.

Example 2.

Joe, born October 1, 1942, reached 70½ in 2013. His wife (his beneficiary) turned 56 in September 2013. He must begin receiving distributions by April 1, 2014. Joe's IRA account balance as of December 31, 2012, is $30,100. Because Joe's wife is more than 10 years younger than Joe and is the sole beneficiary of his IRA, Joe uses Table II in Appendix C. Based on their ages at year end (December 31, 2013), the joint life expectancy for Joe (age 71) and his wife (age 56) is 30.1 years. The required minimum distribution for 2013, Joe's first distribution year, is $1,000 ($30,100 ÷ 30.1). This amount is distributed to Joe on April 1, 2014.

Distribution period.   This is the maximum number of years over which you are allowed to take distributions from the IRA. The period to use for 2013 is listed next to your age as of your birthday in 2013 in Table III in Appendix C.

Life expectancy.   If you must use Table I, your life expectancy for 2014 is listed in the table next to your age as of your birthday in 2014. If you use Table II, your life expectancy is listed where the row or column containing your age as of your birthday in 2014 intersects with the row or column containing your spouse's age as of his or her birthday in 2014. Both Table I and Table II are in Appendix C.

Distributions during your lifetime.   Required minimum distributions during your lifetime are based on a distribution period that generally is determined using Table III (Uniform Lifetime) in Appendix C. However, if the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you, see Sole beneficiary spouse who is more than 10 years younger below.

  To figure the required minimum distribution for 2014, divide your account balance at the end of 2013 by the distribution period from the table. This is the distribution period listed next to your age (as of your birthday in 2014) in Table III in Appendix C, unless the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you.

Example.

You own a traditional IRA. Your account balance at the end of 2013 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 6 years younger than you. You turn 75 years old in 2014. You use Table III. Your distribution period is 22.9. Your required minimum distribution for 2014 would be $4,367 ($100,000 ÷ 22.9).

Sole beneficiary spouse who is more than 10 years younger.   If the sole beneficiary of your IRA is your spouse and your spouse is more than 10 years younger than you, use the life expectancy from Table II (Joint Life and Last Survivor Expectancy) in Appendix C.

  The life expectancy to use is the joint life and last survivor expectancy listed where the row or column containing your age as of your birthday in 2014 intersects with the row or column containing your spouse's age as of his or her birthday in 2014.

  You figure your required minimum distribution for 2014 by dividing your account balance at the end of 2013 by the life expectancy from Table II (Joint Life and Last Survivor Expectancy) in Appendix C.

Example.

You own a traditional IRA. Your account balance at the end of 2013 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 11 years younger than you. You turn 75 in 2014 and your spouse turns 64. You use Table II. Your joint life and last survivor expectancy is 23.6. Your required minimum distribution for 2014 would be $4,237 ($100,000 ÷ 23.6).

Distributions in the year of the owner's death.   The required minimum distribution for the year of the owner's death depends on whether the owner died before the required beginning date, defined earlier.

  If the owner died before the required beginning date, there is no required minimum distribution in the year of the owner's death. For years after the year of the owner's death, see Owner Died Before Required Beginning Date , later, under IRA Beneficiaries.

  If the owner died on or after the required beginning date, the IRA beneficiaries are responsible for figuring and distributing the owner's required minimum distribution in the year of death. The owner's required minimum distribution for the year of death generally is based on Table III (Uniform Lifetime) in Appendix C. However, if the sole beneficiary of the IRA is the owner's spouse who is more than 10 years younger than the owner, use the life expectancy from Table II (Joint Life and Last Survivor Expectancy).

Note.

You figure the required minimum distribution for the year in which an IRA owner dies as if the owner lived for the entire year.

IRA Beneficiaries

The rules for determining required minimum distributions for beneficiaries depend on the following.

  • The beneficiary is the surviving spouse.

  • The beneficiary is an individual (other than the surviving spouse).

  • The beneficiary is not an individual (for example, the beneficiary is the owner's estate). (But see Trust as beneficiary , later, for a discussion about treating trust beneficiaries as designated beneficiaries.)

  • The IRA owner died before the required beginning date, or died on or after the required beginning date.

The following paragraphs explain the rules for required minimum distributions and beneficiaries.

If distributions to the beneficiary from an inherited traditional IRA are less than the required minimum distribution for the year, discussed in this chapter under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. For details, see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? later in this chapter.

Surviving spouse.   If you are the surviving spouse who is the sole beneficiary of your deceased spouse's IRA, you may elect to be treated as the owner and not as the beneficiary. If you elect to be treated as the owner, you determine the required minimum distribution (if any) as if you were the owner beginning with the year you elect or are deemed to be the owner. For details, see Inherited from spouse under What if You Inherit an IRA, earlier in this chapter.

Note.

If you become the owner in the year your deceased spouse died, do not determine the required minimum distribution for that year using your life; rather, you must take the deceased owner's required minimum distribution for that year (to the extent it was not already distributed to the owner before his or her death).

  
You can never make a rollover contribution of a required minimum distribution. Any rollover contribution is subject to the 6% tax on excess contributions, as discussed in Rollover of required distributions not allowed, earlier.

  
For any year after the owner’s death, where a surviving spouse is the sole designated beneficiary of the account and he or she fails to take a required minimum distribution (if one is required) by December 31 under the rules discussed below for beneficiaries, he or she will be deemed the owner of the IRA. For details, see Inherited from spouse under What if You Inherit an IRA, earlier in this chapter.

Date the designated beneficiary is determined.   Generally, the designated beneficiary is determined on September 30 of the calendar year following the calendar year of the IRA owner's death. In order to be a designated beneficiary, an individual must be a beneficiary as of the date of death. Any person who was a beneficiary on the date of the owner's death, but is not a beneficiary on September 30 of the calendar year following the calendar year of the owner's death (because, for example, he or she disclaimed entitlement or received his or her entire benefit), will not be taken into account in determining the designated beneficiary. An individual may be designated as a beneficiary either by the terms of the plan or, if the plan permits, by affirmative election by the employee specifying the beneficiary.

Note.

If a person who is a beneficiary as of the owner's date of death dies before September 30 of the year following the year of the owner's death without disclaiming entitlement to benefits, that individual, rather than his or her successor beneficiary, continues to be treated as a beneficiary for determining the distribution period.

For the exception to this rule, see Death of surviving spouse prior to date distributions begin , later.

Death of a beneficiary.   In general, the beneficiaries of a deceased beneficiary must continue to take the required minimum distributions after the deceased beneficiary’s death, based on the distribution schedule established by that beneficiary under the rules in the following paragraphs. The beneficiaries of a deceased beneficiary do not calculate required minimum distributions using their own life expectancies.

  For the exception to this rule, see Death of surviving spouse prior to date distributions begin , later.

More than one beneficiary.   If an IRA has more than one beneficiary or a trust is named as beneficiary, see Miscellaneous Rules for Required Minimum Distributions , later.

Owner Died On or After Required Beginning Date

If the owner died on or after his or her required beginning date (defined earlier), and you are the designated beneficiary, you must base required minimum distributions for years after the year of the owner's death on the longer of:

Surviving spouse is sole designated beneficiary.   If the owner died on or after his or her required beginning date and his or her spouse is the sole designated beneficiary, the life expectancy the spouse must use to figure his or her required minimum distribution may change in a future distribution year. This change will apply where the spouse is older than the deceased owner or the spouse treats the IRA as his or her own.

Owner Died Before Required Beginning Date

If the owner died before his or her required beginning date (defined earlier), and you are the designated beneficiary, you generally must base required minimum distributions for years after the year of the owner's death using your single life expectancy shown on Table I in Appendix C as determined under Beneficiary an individual , later.

See 5-year rule , later, for situations where an individual designated beneficiary may be required to take the entire account by the end of the fifth year following the year of the owner's death.

If the owner's beneficiary is not an individual (for example, if the beneficiary is the owner's estate), the 5-year rule (discussed later) applies.

Special rules for surviving spouse.   If the owner died before his or her required beginning date and the surviving spouse is the sole designated beneficiary, the following rules apply.

Year of first required distribution.   If the owner died before the year in which he or she reached age 70½, distributions to the spouse do not need to begin until the year in which the owner would have reached age 70½.

Death of surviving spouse prior to date distributions begin.   If the surviving spouse dies before December 31 of the year he or she must begin receiving required minimum distributions, the surviving spouse will be treated as if he or she were the owner of the IRA.

  This rule does not apply to the surviving spouse of a surviving spouse.

Example 1.

Your spouse died in 2011, at age 65½. You are the sole designated beneficiary of your spouse’s traditional IRA. You do not need to take any required minimum distribution until December 31 of 2016, the year your spouse would have reached age 70½. If you die prior to that date, you will be treated as the owner of the IRA for purposes of determining the required distributions to your beneficiaries. For example, if you die in 2013, your beneficiaries will not have any required minimum distribution for 2013 (because you, treated as the owner, died prior to your required beginning date). They must start taking distributions under the general rules for an owner who died prior to the required beginning date.

Example 2.

Same as Example 1 , except your sole beneficiary upon your death in 2013 is your surviving spouse. Your surviving spouse cannot wait until the year you would have turned 70½ to take distributions using his or her life expectancy. Also, if your surviving spouse dies prior to the date he or she is required to take a distribution, he or she is not treated as the owner of the account. Just like any other individual beneficiary of an owner who dies before the required beginning date, your surviving spouse must start taking distributions in 2014 based on his or her life expectancy (or elect to fully distribute the account under the 5-year rule by the end of 2018).

5-year rule.   The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2013, the beneficiary would have to fully distribute the plan by December 31, 2018. The beneficiary is allowed, but not required, to take distributions prior to that date. The 5-year rule never applies if the owner died on or after his or her required beginning date.

Individual designated beneficiaries.   The terms of most IRA plans require individual designated beneficiaries to take required minimum distributions using the life expectancy rules (explained earlier) unless such beneficiaries elect to take distributions using the 5-year rule. The deadline for making this election is December 31 of the year the beneficiary must take the first required distribution using his or her life expectancy (or December 31 of the year containing the fifth anniversary of the owner's death, if earlier).

Beneficiary not an individual.   The 5-year rule applies in all cases where there is no individual designated beneficiary by September 30 of the year following the year of the owner’s death or where any beneficiary is not an individual (for example, the owner named his or her estate as the beneficiary).

  
Review the IRA plan documents or consult with the IRA custodian or trustee for specifics on the 5-year rule provisions of any particular plan.

  
If the 5-year rule applies, the amount remaining in the IRA, if any, after December 31 of the year containing the fifth anniversary of the owner's death is subject to the 50% excise tax detailed in Excess Accumulations (Insufficient Distributions), later.

Figuring the Beneficiary's Required Minimum Distribution

How you figure the required minimum distribution depends on whether the beneficiary is an individual or some other entity, such as a trust or estate.

Beneficiary an individual.   If the beneficiary is an individual, to figure the required minimum distribution for 2014, divide the account balance at the end of 2013 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix C. Determine the appropriate life expectancy as follows.

Spouse as sole designated beneficiary.   Use the life expectancy listed in the table next to the spouse's age (as of the spouse's birthday in 2014). Use this life expectancy even if the spouse died in 2014.

  If the spouse died in 2013 or a prior year, use the life expectancy listed in the table next to the spouse’s age as of his or her birthday in the year he or she died. Reduce the life expectancy by one for each year since the year following the spouse’s death.

  
You cannot make a rollover contribution of your required minimum distributions in years after the owner's death. Such contribution is subject to the 6% tax on excess contributions, as discussed in Rollover of required distributions not allowed, earlier.

Other designated beneficiary.    Use the life expectancy listed in the table next to the beneficiary's age as of his or her birthday in the year following the year of the owner's death. Reduce the life expectancy by one for each year since the year following the owner's death. As discussed in Death of a beneficiary , earlier, if the designated beneficiary dies before his or her portion of the account is fully distributed, continue to use the designated beneficiary's remaining life expectancy to determine the distribution period; do not use the life expectancy of any subsequent beneficiary.

Example.

Your father died in 2013. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2014, which is the year following your father's death. You use Table I and see that your life expectancy in 2014 is 31.4. If the IRA was worth $100,000 at the end of 2013, your required minimum distribution for 2014 would be $3,185 ($100,000 ÷ 31.4). If the value of the IRA at the end of 2014 was again $100,000, your required minimum distribution for 2015 would be $3,289 ($100,000 ÷ 30.4 (31.4 reduced by 1, which is the number of years following the year after your father's death in 2013)).

Beneficiary not an individual.   If the beneficiary is not an individual, determine the required minimum distribution for 2014 as follows.

Death on or after required beginning date.   Divide the account balance at the end of 2013 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix C. Use the life expectancy listed next to the owner's age as of his or her birthday in the year of death. Reduce the life expectancy by one for each year after the year of death. (Note. Also figure the required minimum distribution for an individual beneficiary using this method if it results in a longer life expectancy where the owner died on or after the required beginning date.)

Death before required beginning date.   The 5-year rule (discussed earlier) applies. The entire account must be distributed by the end of the fifth year following the year of the owner's death. No distribution is required for any year before that fifth year.

Note.

The required beginning date was defined earlier under Distributions by the required beginning date .

Example.

The owner died in 2013 at the age of 80. The owner's traditional IRA went to his estate. The account balance at the end of 2013 was $100,000. In 2014, the required minimum distribution would be $10,870 ($100,000 ÷ 9.2). (The owner's life expectancy in the year of death, 10.2, reduced by one.) If the owner had died in 2013 at the age of 70, the entire account would have to be distributed by the end of 2018. See Death before required beginning date under Beneficiary not an individual above.

Which Table Do You Use To Determine Your Required Minimum Distribution?

There are three different life expectancy tables. The tables are found in Appendix C of this publication. You use only one of them to determine your required minimum distribution for each traditional IRA. Determine which one to use as follows.

Reminder.

In using the tables for lifetime distributions, marital status is determined as of January 1 each year. Divorce or death after January 1 is generally disregarded until the next year. However, if you divorce and change the beneficiary designation in the same year, your former spouse cannot be considered your sole beneficiary for that year.

Table I (Single Life Expectancy).   Use Table I for years after the year of the owner's death if either of the following applies.
  • You are an individual and a designated beneficiary, but not the owner's surviving spouse and sole designated beneficiary.

  • The beneficiary is not an individual and the owner died on or after the required beginning date, defined earlier.

Surviving spouse.   If you are the owner's surviving spouse and sole designated beneficiary, you will also use Table I for your required minimum distributions. However, if the owner had not reached age 70½ when he or she died, and you do not elect to be treated as the owner of the IRA, you do not have to take distributions until the year in which the owner would have reached age 70½.

Table II (Joint Life and Last Survivor Expectancy).   Use Table II if you are the IRA owner and your spouse is both your sole designated beneficiary and more than 10 years younger than you.

Note.

Use this table in the year of the owner's death if the owner died after the required beginning date and this is the table that would have been used had he or she not died.

Table III (Uniform Lifetime).   Use Table III if you are the IRA owner and your spouse is not both the sole designated beneficiary of your IRA and more than 10 years younger than you.

Note.

Use this table in the year of the owner's death if the owner died after the required beginning date and this is the table that would have been used had he or she not died.

No table.   Do not use any of the tables if the 5-year rule (discussed earlier) applies.

What Age(s) Do You Use With the Table(s)?

The age or ages to use with each table are explained below.

Table I (Single Life Expectancy).   If you are a designated beneficiary figuring your first distribution, use your age as of your birthday in the year distributions must begin. This is usually the calendar year immediately following the calendar year of the owner's death. After the first distribution year, reduce your life expectancy by one for each subsequent year. If you are the owner's surviving spouse and the sole designated beneficiary, this is generally the year in which the owner would have reached age 70½. After the first distribution year, use your age as of your birthday in each subsequent year.

Example 1.

You are the owner's designated beneficiary figuring your first required minimum distribution. Distributions must begin in 2014. You become 57 years old in 2014. You use Table I. Your distribution period for 2015 is 26.9 (27.9 − 1) years. Your distribution period for 2016 is 25.9 (27.9 − 2). Note that the life expectancy was reduced by one for each year after the first distribution year, which was 2014.

Example 2.

You are the owner's surviving spouse and the sole designated beneficiary. The owner would have turned age 70½ in 2014. Distributions begin in 2014. You become 69 years old in 2014. You use Table 1. Your distribution period for 2014 is 17.8. For 2015, when you are 70 years old, your distribution period is 17.0. For 2016, when you are 71 years old, your distribution period is 16.3.

Owner's life expectancy.   In two cases where the owner dies on or after the required beginning date, you need to use the owner's life expectancy. First, you need to use it when the owner dies on or after the required beginning date and there is no designated beneficiary as of September 30 of the year following the year of the owner's death. In this case, use the owner's life expectancy for his or her age as of the owner's birthday in the year of death and reduce it by one for each subsequent year. Second, use the owner’s life expectancy in the year of death (reduced by one for each subsequent year) if it results in a longer distribution period than using your life expectancy as detailed in Table I (Single Life Expectancy) above.

Table II (Joint Life and Last Survivor Expectancy).   For your first distribution by the required beginning date, use your age and the age of your designated beneficiary as of your birthdays in the year you become age 70½. Your combined life expectancy is at the intersection of your ages.

  If you are figuring your required minimum distribution for 2014, use your ages as of your birthdays in 2014. For each subsequent year, use your and your spouse's ages as of your birthdays in the subsequent year.

Table III (Uniform Lifetime).   For your first distribution by your required beginning date, use your age as of your birthday in the year you become age 70½.

  If you are figuring your required minimum distribution for 2014, use your age as of your birthday in 2014. For each subsequent year, use your age as of your birthday in the subsequent year.

Miscellaneous Rules for Required Minimum Distributions

The following rules may apply to you.

Installments allowed.   The yearly required minimum distribution can be taken in a series of installments (monthly, quarterly, etc.) as long as the total distributions for the year are at least as much as the minimum required amount.

More than one IRA.   If you have more than one traditional IRA, you must determine a separate required minimum distribution for each IRA. However, you can total these minimum amounts and take the total from any one or more of the IRAs.

Example.

Sara, born August 1, 1942, became 70½ on February 1, 2013. She has two traditional IRAs. She must begin receiving her IRA distributions by April 1, 2014. On December 31, 2012, Sara's account balance from IRA A was $10,000; her account balance from IRA B was $20,000. Sara's brother, age 64 as of his birthday in 2013, is the beneficiary of IRA A. Her husband, age 78 as of his birthday in 2013, is the beneficiary of IRA B.

Sara's required minimum distribution from IRA A is $377 ($10,000 ÷ 26.5 (the distribution period for age 71 per Table III)). The amount of the required minimum distribution from IRA B is $755 ($20,000 ÷ 26.5). The amount that must be withdrawn by Sara from her IRA accounts by April 1, 2014, is $1,132 ($377 + $755).

More than minimum received.   If, in any year, you receive more than the required minimum amount for that year, you will not receive credit for the additional amount when determining the minimum required amounts for future years. This does not mean that you do not reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you cannot treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year.

Example.

Justin became 70½ on December 15, 2013. Justin's IRA account balance on December 31, 2012, was $38,400. He figured his required minimum distribution for 2013 was $1,401 ($38,400 ÷ 27.4 (the distribution period for age 70 per Table III)). By December 31, 2013, he had actually received distributions totaling $3,600, $2,199 more than was required. Justin cannot use that $2,199 to reduce the amount he is required to withdraw for 2014, but his IRA account balance is reduced by the full $3,600 to figure his required minimum distribution for 2014. Justin's reduced IRA account balance on December 31, 2013, was $34,800. Justin figured his required minimum distribution for 2014 is $1,313 ($34,800 ÷ 26.5 (the distribution period for age 71 per Table III)). During 2014, he must receive distributions of at least that amount.

Multiple individual beneficiaries.   If as of September 30 of the year following the year in which the owner dies there is more than one beneficiary, the beneficiary with the shortest life expectancy will be the designated beneficiary if both of the following apply.
  • All of the beneficiaries are individuals, and

  • The account or benefit has not been divided into separate accounts or shares for each beneficiary.

Separate accounts.   A single IRA can be split into separate accounts or shares for each beneficiary. These separate accounts or shares can be established at any time, either before or after the owner's required beginning date. Generally, these separate accounts or shares are combined for purposes of determining the minimum required distribution. However, these separate accounts or shares will not be combined for required minimum distribution purposes after the death of the IRA owner if the separate accounts or shares are established by the end of the year following the year of the IRA owner's death.

  The separate account rules cannot be used by beneficiaries of a trust.

Trust as beneficiary.   A trust cannot be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death (or after the death of the owner’s surviving spouse described in Death of surviving spouse prior to date distributions begin , earlier) if all of the following are true:
  1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.

  2. The trust is irrevocable or became, by its terms, irrevocable upon the owner's death.

  3. The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit are identifiable from the trust instrument.

  4. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan.

  The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death.

Trust beneficiary is another trust.   If the beneficiary of the trust (which is the beneficiary of the IRA) is another trust and both trusts meet the above requirements, the beneficiaries of the other trust will be treated as having been designated as beneficiaries for purposes of determining the distribution period.

Note.

The separate account rules, discussed earlier, cannot be used by beneficiaries of a trust.

You may want to contact a tax advisor to comply with this complicated area of the tax law.

Annuity distributions from an insurance company.   Special rules apply if you receive distributions from your traditional IRA as an annuity purchased from an insurance company. See Regulations sections 1.401(a)(9)-6 and 54.4974-2. These regulations can be found in many libraries, IRS offices, and online at IRS.gov.

Are Distributions Taxable?

In general, distributions from a traditional IRA are taxable in the year you receive them.

Failed financial institutions.   Distributions from a traditional IRA are taxable in the year you receive them even if they are made without your consent by a state agency as receiver of an insolvent savings institution. This means you must include such distributions in your gross income unless you roll them over. For an exception to the 1-year waiting period rule for rollovers of certain distributions from failed financial institutions, see Exception under Rollover From One IRA Into Another, earlier.

Exceptions.   Exceptions to distributions from traditional IRAs being taxable in the year you receive them are:

Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions explained earlier and in chapter 2.

Qualified charitable distributions.    A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must be at least age 70½ when the distribution was made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution. See Records To Keep in Publication 526, Charitable Contributions.

  The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

  
A QCD will count towards your required minimum distribution, discussed earlier.

  
You cannot claim a charitable contribution deduction for any QCD not included in your income.

Example.

On November 1, 2013, Jeff, age 75, directed the trustee of his IRA to make a distribution of $25,000 directly to a qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions). The total value of Jeff’s IRA is $30,000 and consists $20,000 of deductible contributions and earnings and $10,000 of nondeductible contributions (basis). Since Jeff is at least age 70½ and the distribution is made directly by the trustee to a qualified organization, the part of the distribution that would otherwise be includible in Jeff’s income ($20,000) is a QCD.

In this case, Jeff has made a QCD of $20,000 (his deductible contributions and earnings). Because Jeff made a distribution of nondeductible contributions from his IRA, he must file Form 8606, Nondeductible IRAs, with his return. Jeff includes the total distribution ($25,000) on line 15a of Form 1040. He completes Form 8606 to determine the amount to enter on line 15b of Form 1040 and the remaining basis in his IRA. Jeff enters -0- on line 15b. This is Jeff’s only IRA and he took no other distributions in 2013. He also enters “QCD” next to line 15b to indicate a qualified charitable distribution.

After the distribution, his basis in his IRA is $5,000. If Jeff itemizes deductions and files Schedule A with Form 1040, the $5,000 portion of the distribution attributable to the nondeductible contributions can be deducted as a charitable contribution, subject to AGI limits. He cannot take charitable contribution deduction for the $20,000 portion of the distribution that was not included in his income.

January 2013 QCDs treated as made in 2012.   If you made a QCD in January 2013, you could have elected to have it treated as made in 2012. If you made this election, the full amount of the QCD counted towards your 2012 required minimum distribution and does not count towards your 2013 required minimum distribution. Even if you made this election, you must report the QCD on your 2013 tax return, as discussed below.

2013 Reporting.   If you made a QCD in 2013, include the full amount of the QCD on your 2013 Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. Any amount over the $100,000 limit must be included on your 2013 Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Be sure to enter “QCD” next to 2013 Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b.

Additional reporting requirements if you made the election to treat a January 2013 QCD as made in 2012.   If you made a QCD in January 2013 and you elected to treat it as made in 2012, this amount will be reported to you on a 2013 Form 1099-R in 2014. You will need to include this amount with any other 2013 distributions on your 2013 Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, even though you already reported it on your 2012 tax return. Report this amount on your 2013 tax return even if it is the only IRA distribution that you are reporting. See 2013 Reporting above and follow the reporting instructions there and in your 2013 tax return.

  If the total of your QCDs made in 2013, including your January QCD that you elected to treat as made in 2012, exceeds $100,000, attach a statement to your return listing your QCDs for 2012 and 2013. If you are married filing a joint return, the $100,000 limit applies separately to each of you.

  If you are required to file a 2013 Form 5329 because you failed to take your total required minimum distributions for 2013, do not include the amount of the January QCD that you elected to treat as made in 2012 on Form 5329, line 51.

Example.

Victor has only one IRA with a total value of $250,000 as of December 31, 2012. It consists of deductible contributions and earnings, therefore he does not have to fill out a Form 8606.

On January 15, 2013, Victor, age 77, directed the trustee of his IRA to make a distribution of $25,000 directly to a qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions). This transaction meets the requirements to be considered a QCD, see discussion earlier. He elected to treat this QCD as if it was made in 2012. He reported this amount on his 2012 Form 1040, line 15a. The full amount of this QCD would count towards his 2012 required minimum distribution but would not count towards his 2013 required minimum distribution given his election.

On November 29, 2013, Victor directs the trustee of the same IRA above to make another distribution of $25,000 directly to the same organization. This qualifies as a QCD. This amount would count towards his 2013 required minimum distribution.

On January 30, 2014, he receives his 2013 Form 1099-R reporting a total distribution of $50,000 for his QCDs. The QCDs were the only distributions made from his IRA in 2013. When he fills out his 2013 Form 1040, he will enter $50,000 on line 15a, and -0- on line 15b and “QCD” next to that line.

One-time qualified HSA funding distribution.   You may be able to make a qualified HSA funding distribution from your traditional IRA or Roth IRA to your Health Savings Account (HSA). You cannot make this distribution from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. The distribution must be less than or equal to your maximum annual HSA contribution.

  This distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. You must make the distribution by the end of the year; the special rule allowing contributions to your HSA for the previous year if made by your tax return filing deadline does not apply. The qualified HSA funding distribution is reported on Form 8889, Health Savings Accounts, for the year in which the distribution is made.

One-time transfer.   Generally, only one qualified HSA funding distribution is allowed during your lifetime. If you own two or more IRAs, and want to use amounts in multiple IRAs to make a qualified HSA funding distribution, you must first make an IRA-to-IRA transfer of the amounts to be distributed into a single IRA, and then make the one-time qualified HSA funding distribution from that IRA.

Testing period rules apply.   If at any time during the testing period you cease to meet all requirements to be an eligible individual, the amount of the qualified HSA funding distribution is included in your gross income. The qualified HSA funding distribution is included in gross income in the taxable year you first fail to be an eligible individual. This amount is subject to the 10 percent additional tax (unless the failure is due to disability or death).

More information.   See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for additional information about this distribution.

Ordinary income.   Distributions from traditional IRAs that you include in income are taxed as ordinary income.

No special treatment.   In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified retirement plans.

Distributions Fully or Partly Taxable

Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.

Fully taxable.   If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Because you have no basis in your IRA, any distributions are fully taxable when received. See Reporting and Withholding Requirements for Taxable Amounts , later.

Partly taxable.   If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.

  Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable.

Form 8606.   You must complete Form 8606, and attach it to your return, if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. Using the form, you will figure the nontaxable distributions for 2013, and your total IRA basis for 2013 and earlier years. See the illustrated Forms 8606 in this chapter.

Note.

If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. Complete Form 8606, sign it, and send it to the IRS at the time and place you would otherwise file an income tax return.

Figuring the Nontaxable and Taxable Amounts

If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2013, you must use Form 8606 to figure how much of your 2013 IRA distribution is tax free.

Note.

When figuring the nontaxable and taxable amounts of distributions made prior to death in the year the IRA account owner dies, the value of all traditional (including SEP) and SIMPLE IRAs should be figured as of the date of death instead of December 31.

Contribution and distribution in the same year.   If you received a distribution in 2013 from a traditional IRA and you also made contributions to a traditional IRA for 2013 that may not be fully deductible because of the income limits, you can use Worksheet 1-5 to figure how much of your 2013 IRA distribution is tax free and how much is taxable. Then you can figure the amount of nondeductible contributions to report on Form 8606. Follow the instructions under Reporting your nontaxable distribution on Form 8606, next, to figure your remaining basis after the distribution.

Reporting your nontaxable distribution on Form 8606.   To report your nontaxable distribution and to figure the remaining basis in your traditional IRA after distributions, you must complete Worksheet 1-5 before completing Form 8606. Then follow these steps to complete Form 8606.
  1. Use Worksheet 1-2, earlier, or the IRA Deduction Worksheet in the Form 1040, 1040A, or 1040NR instructions to figure your deductible contributions to traditional IRAs to report on Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32.

  2. After you complete Worksheet 1-2 or the IRA deduction worksheet in the form instructions, enter your nondeductible contributions to traditional IRAs on line 1 of Form 8606.

  3. Complete lines 2 through 5 of Form 8606.

  4. If line 5 of Form 8606 is less than line 8 of Worksheet 1-5, complete lines 6 through 15 of Form 8606 and stop here.

  5. If line 5 of Form 8606 is equal to or greater than line 8 of Worksheet 1-5, follow instructions 6 and 7, next. Do not complete lines 6 through 12 of Form 8606.

  6. Enter the amount from line 8 of Worksheet 1-5 on lines 13 and 17 of Form 8606.

  7. Complete line 14 of Form 8606.

  8. Enter the amount from line 9 of Worksheet 1-5 (or, if you entered an amount on line 11, the amount from that line) on line 15 of Form 8606.

Worksheet 1-5. Figuring the Taxable Part of Your IRA Distribution

 
Use only if you made contributions to a traditional IRA for 2013 that may not be fully deductible and have to figure the taxable part of your 2013 distributions to determine your modified AGI. See Limit if Covered by Employer Plan , earlier.

Form 8606 and the related instructions will be needed when using this worksheet.

Note. When used in this worksheet, the term outstanding rollover refers to an amount distributed from a traditional IRA as part of a rollover that, as of December 31, 2013, had not yet been reinvested in another traditional IRA, but was still eligible to be rolled over tax free.

1. Enter the basis in your traditional IRAs as of December 31, 2012 1.  
2. Enter the total of all contributions made to your traditional IRAs during 2013 and all contributions made during 2014 that were for 2013, whether or not deductible. Do not include rollover contributions properly rolled over into IRAs. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606. 2.  
3. Add lines 1 and 2 3.  
4. Enter the value of all your traditional IRAs as of December 31, 2013 (include any outstanding rollovers from traditional IRAs to other traditional IRAs). 4.  
5. Enter the total distributions from traditional IRAs (including amounts converted to Roth IRAs that will be shown on line 16 of Form 8606) received in 2013. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2013. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606.) 5.  
6. Add lines 4 and 5 6.  
7. Divide line 3 by line 6. Enter the result as a decimal (rounded to at least three places).  
If the result is 1.000 or more, enter 1.000
7.  
8. Nontaxable portion of the distribution. 
Multiply line 5 by line 7. Enter the result here and on lines 13 and 17 of Form 8606
8.  
9. Taxable portion of the distribution (before adjustment for conversions). 
Subtract line 8 from line 5. Enter the result here and if there are no amounts converted to Roth IRAs, stop here and enter the result on line 15 of Form 8606
9.  
10. Enter the amount included on line 9 that is allocable to amounts converted to Roth IRAs by December 31, 2013. (See Note at the end of this worksheet.) Enter here and on line 18 of Form 8606 10.  
11. Taxable portion of the distribution (after adjustments for conversions).  
Subtract line 10 from line 9. Enter the result here and on line 15 of Form 8606
11.  
Note. If the amount on line 5 of this worksheet includes an amount converted to a Roth IRA by December 31, 2013, you must determine the percentage of the distribution allocable to the conversion. To figure the percentage, divide the amount converted (from line 16 of Form 8606) by the total distributions shown on line 5. To figure the amounts to include on line 10 of this worksheet and on line 18, Part II of Form 8606, multiply line 9 of the worksheet by the percentage you figured.

Example.

Rose Green has made the following contributions to her traditional IRAs.

Year Deductible Nondeductible
2006 2,000 -0-
2007 2,000 -0-
2008 2,000 -0-
2009 1,000 -0-
2010 1,000 -0-
2011 1,000 -0-
2012 700 300
Totals $9,700 $300

Rose needs to complete Worksheet 1–5. Figuring the Taxable Part of Your IRA Distribution to determine if her IRA deduction for 2013 will be reduced or eliminated. In 2013, she makes a $2,000 contribution that may be partly nondeductible. She also receives a distribution of $5,000 for conversion to a Roth IRA. She completed the conversion before December 31, 2013, and did not recharacterize any contributions. At the end of 2013, the fair market values of her accounts, including earnings, total $20,000. She did not receive any tax-free distributions in earlier years. The amount she includes in income for 2013 is figured on Worksheet 1-5. Figuring the Taxable Part of Your IRA Distribution—Illustrated.

The illustrated Form 8606 for Rose shows the information required when you need to use Worksheet 1-5 to figure your nontaxable distribution. Assume that the $500 entered on Form 8606, line 1, is the amount Rose figured using instructions 1 and 2 given earlier under Reporting your nontaxable distribution on Form 8606 .

Worksheet 1-5. Figuring the Taxable Part of Your IRA Distribution—Illustrated

Use only if you made contributions to a traditional IRA for 2013 that may not be fully deductible and have to figure the taxable part of your 2013 distributions to determine your modified AGI. See Limit if Covered by Employer Plan , earlier.

 
Form 8606 and the related instructions will be needed when using this worksheet.

Note. When used in this worksheet, the term outstanding rollover refers to an amount distributed from a traditional IRA as part of a rollover that, as of December 31, 2013, had not yet been reinvested in another traditional IRA, but was still eligible to be rolled over tax free.

1. Enter the basis in your traditional IRAs as of December 31, 2012 1. 300
2. Enter the total of all contributions made to your traditional IRAs during 2013 and all contributions made during 2014 that were for 2013, whether or not deductible. Do not include rollover contributions properly rolled over into IRAs. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606. 2. 2,000
3. Add lines 1 and 2 3. 2,300
4. Enter the value of all your traditional IRAs as of December 31, 2013 (include any outstanding rollovers from traditional IRAs to other traditional IRAs) 4. 20,000
5. Enter the total distributions from traditional IRAs (including amounts converted to Roth IRAs that will be shown on line 16 of Form 8606) received in 2013. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2013. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606.) 5. 5,000
6. Add lines 4 and 5 6. 25,000
7. Divide line 3 by line 6. Enter the result as a decimal (rounded to at least three places). 
If the result is 1.000 or more, enter 1.000
7. .092
8. Nontaxable portion of the distribution. 
Multiply line 5 by line 7. Enter the result here and on lines 13 and 17 of Form 8606
8. 460
9. Taxable portion of the distribution (before adjustment for conversions). 
Subtract line 8 from line 5. Enter the result here and if there are no amounts converted to Roth IRAs, stop here and enter the result on line 15 of Form 8606
9. 4,540
10. Enter the amount included on line 9 that is allocable to amounts converted to Roth IRAs by December 31, 2013. (See Note at the end of this worksheet.) Enter here and on line 18 of Form 8606 10. 4,540
11. Taxable portion of the distribution (after adjustments for conversions).  
Subtract line 10 from line 9. Enter the result here and on line 15 of Form 8606
11. 0
Note. If the amount on line 5 of this worksheet includes an amount converted to a Roth IRA by December 31, 2013, you must determine the percentage of the distribution allocable to the conversion. To figure the percentage, divide the amount converted (from line 16 of Form 8606) by the total distributions shown on line 5. To figure the amounts to include on line 10 of this worksheet and on line 18, Part II of Form 8606, multiply line 9 of the worksheet by the percentage you figured.

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Form 8606, page 1 - Rose Green

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Form 8606, page 2 - Rose Green

Recognizing Losses on Traditional IRA Investments

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any.

Your basis is the total amount of the nondeductible contributions in your traditional IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Example.

Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2012 of $2,000. By the end of 2013, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + $400 − $600) at year's end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606 (illustrated).

In 2014, Bill's IRA has a loss of $500. At the end of that year, Bill's IRA balance is $1,300 ($1,800 − $500). Bill's remaining basis in his IRA is $1,500 ($2,000 − $500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2014 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).

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Form 8606 - Bill King $100

Other Special IRA Distribution Situations

Two other special IRA distribution situations are discussed next.

Distribution of an annuity contract from your IRA account.   You can tell the trustee or custodian of your traditional IRA account to use the amount in the account to buy an annuity contract for you. You are not taxed when you receive the annuity contract (unless the annuity contract is being converted to an annuity held by a Roth IRA). You are taxed when you start receiving payments under that annuity contract.

Tax treatment.   If only deductible contributions were made to your traditional IRA since it was opened (this includes all your traditional IRAs, if you have more than one), the annuity payments are fully taxable.

  If any of your traditional IRAs include both deductible and nondeductible contributions, the annuity payments are taxed as explained earlier under Distributions Fully or Partly Taxable .

Cashing in retirement bonds.   When you cash in retirement bonds, you are taxed on the entire amount you receive. Unless you have already cashed them in, you will be taxed on the entire value of your bonds in the year in which you reach age 70½. The value of the bonds is the amount you would have received if you had cashed them in at the end of that year. When you later cash in the bonds, you will not be taxed again.

Reporting and Withholding Requirements for Taxable Amounts

If you receive a distribution from your traditional IRA, you will receive Form 1099-R, or a similar statement. IRA distributions are shown in boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA.

Number codes.   Some of the number codes are explained below. All of the codes are explained in the instructions for recipients on Form 1099-R.

  

1—Early distribution, no known exception.

2—Early distribution, exception applies.

3—Disability.

4—Death.

5—Prohibited transaction.

7—Normal distribution.

8—Excess contributions plus earnings/  
excess deferrals (and/or earnings)  
taxable in 2013.

If code 1, 5, or 8 appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code 1 appears, see Early Distributions, later. If code 5 appears, see Prohibited Transactions, later. If code 8 appears, see Excess Contributions, later.

Letter codes.   Some of the letter codes are explained below. All of the codes are explained in the instructions for recipients on Form 1099-R.

  

B—Designated Roth account distribution.

G—Direct rollover of a distribution (other than a designated Roth account distribution) to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA.

H—Direct rollover of a designated Roth account distribution to a Roth IRA.

J—Early distribution from a Roth IRA.

N—Recharacterized IRA contribution made for 2013  
and recharacterized in 2013.

P—Excess contributions plus earnings/  
excess deferrals taxable in 2012.

Q—Qualified distribution from a Roth IRA.

R—Recharacterized IRA contribution made for 2012 
and recharacterized in 2013.

S—Early distribution from a SIMPLE IRA in the first 
2 years, no known exception.

T—Roth IRA distribution, exception applies.

If the distribution shown on Form 1099-R is from your IRA, SEP IRA, or SIMPLE IRA, the small box in box 7 (labeled IRA/SEP/SIMPLE) should be marked with an “X.

If code J, P, or S appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code J appears, see Early Distributions, later. If code P appears, see Excess Contributions, later. If code S appears, see Additional Tax on Early Distributions in chapter 3.

Withholding.   Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld.

  The amount of tax withheld from an annuity or a similar periodic payment is based on your marital status and the number of withholding allowances you claim on your withholding certificate (Form W-4P). If you have not filed a certificate, tax will be withheld as if you are a married individual claiming three withholding allowances.

  Generally, tax will be withheld at a 10% rate on nonperiodic distributions.

IRA distributions delivered outside the United States.   In general, if you are a U.S. citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA.

  To choose exemption from withholding, you must certify to the payer under penalties of perjury that you are not a U.S. citizen, a resident alien of the United States, or a tax-avoidance expatriate.

  Even if this election is made, the payer must withhold tax at the rates prescribed for nonresident aliens.

More information.   For more information on withholding on pensions and annuities, see Pensions and Annuities in chapter 1 of Publication 505, Tax Withholding and Estimated Tax. For more information on withholding on nonresident aliens and foreign entities, see Pensions, Annuities, and Alimony under Withholding on Specific Income in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Reporting taxable distributions on your return.   Report fully taxable distributions, including early distributions, on Form 1040, line 15b (no entry is required on line 15a); Form 1040A, line 11b (no entry is required on line 11a); or Form 1040NR, line 16b (no entry is required on line 16a). If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, and enter the taxable part on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. You cannot report distributions on Form 1040EZ or Form 1040NR-EZ.

Estate tax.   Generally, the value of an annuity or other payment receivable by any beneficiary of a decedent's traditional IRA that represents the part of the purchase price contributed by the decedent (or by his or her former employer(s)) must be included in the decedent's gross estate. For more information, see the Instructions for Schedule I, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

What Acts Result in Penalties or Additional Taxes?

The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.

  • Investing in collectibles.

  • Making excess contributions.

  • Taking early distributions.

  • Allowing excess amounts to accumulate (failing to take required distributions).

There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required.

This chapter discusses those acts that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you do not avoid those acts.

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are some examples of prohibited transactions with a traditional IRA.

  • Borrowing money from it.

  • Selling property to it.

  • Using it as security for a loan.

  • Buying property for personal use (present or future) with IRA funds.

Fiduciary.   For these purposes, a fiduciary includes anyone who does any of the following.
  • Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets.

  • Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so.

  • Has any discretionary authority or discretionary responsibility in administering your IRA.

Effect on an IRA account.   Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.

Effect on you or your beneficiary.   If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Distributions Taxable , earlier. The distribution may be subject to additional taxes or penalties.

Borrowing on an annuity contract.   If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions, discussed later.

Pledging an account as security.   If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions, discussed later.

Trust account set up by an employer or an employee association.   Your account or annuity does not lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a prohibited transaction.

Owner participation.   If you participate in the prohibited transaction with your employer or the association, your account is no longer treated as an IRA.

Taxes on prohibited transactions.   If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected.

Loss of IRA status.   If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary are not liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under Effect on you or your beneficiary , earlier.

Exempt Transactions

The following two types of transactions are not prohibited transactions if they meet the requirements that follow.

  • Payments of cash, property, or other consideration by the sponsor of your traditional IRA to you (or members of your family).

  • Your receipt of services at reduced or no cost from the bank where your traditional IRA is established or maintained.

Payments of cash, property, or other consideration.   Even if a sponsor makes payments to you or your family, there is no prohibited transaction if all three of the following requirements are met.
  1. The payments are for establishing a traditional IRA or for making additional contributions to it.

  2. The IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries.

  3. During the year, the total fair market value of the payments you receive is not more than:

    1. $10 for IRA deposits of less than $5,000, or

    2. $20 for IRA deposits of $5,000 or more.

If the consideration is group term life insurance, requirements (1) and (3) do not apply if no more than $5,000 of the face value of the insurance is based on a dollar-for-dollar basis on the assets in your IRA.

Services received at reduced or no cost.   Even if a sponsor provides services at reduced or no cost, there is no prohibited transaction if all of the following requirements are met.
  • The traditional IRA qualifying you to receive the services is established and maintained for the benefit of you, your spouse, and your or your spouse's beneficiaries.

  • The bank itself can legally offer the services.

  • The services are provided in the ordinary course of business by the bank (or a bank affiliate) to customers who qualify but do not maintain an IRA (or a Keogh plan).

  • The determination, for a traditional IRA, of who qualifies for these services is based on an IRA (or a Keogh plan) deposit balance equal to the lowest qualifying balance for any other type of account.

  • The rate of return on a traditional IRA investment that qualifies is not less than the return on an identical investment that could have been made at the same time at the same branch of the bank by a customer who is not eligible for (or does not receive) these services.

Investment in Collectibles

If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later.

Any amounts that were considered to be distributed when the investment in the collectible was made, and which were included in your income at that time, are not included in your income when the collectible is actually distributed from your IRA.

Collectibles.   These include:
  • Artworks,

  • Rugs,

  • Antiques,

  • Metals,

  • Gems,

  • Stamps,

  • Coins,

  • Alcoholic beverages, and

  • Certain other tangible personal property.

Exception.   Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Excess Contributions

Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:

  • $5,500 ($6,500 if you are age 50 or older), or

  • Your taxable compensation for the year.

The taxable compensation limit applies whether your contributions are deductible or nondeductible.

Contributions for the year you reach age 70½ and any later year are also excess contributions.

An excess contribution could be the result of your contribution, your spouse's contribution, your employer's contribution, or an improper rollover contribution. If your employer makes contributions on your behalf to a SEP IRA, see chapter 2 of Publication 560.

Tax on Excess Contributions

In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year.

The additional tax is figured on Form 5329. For information on filing Form 5329, see Reporting Additional Taxes , later.

Example.

For 2013, Paul Jones is 45 years old and single, his compensation is $31,000, and he contributed $6,000 to his traditional IRA. Paul has made an excess contribution to his IRA of $500 ($6,000 minus the $5,500 limit). The contribution earned $5 interest in 2013 and $6 interest in 2014 before the due date of the return, including extensions. He does not withdraw the $500 or the interest it earned by the due date of his return, including extensions.

Paul figures his additional tax for 2013 by multiplying the excess contribution ($500) shown on Form 5329, line 16, by .06, giving him an additional tax liability of $30. He enters the tax on Form 5329, line 17, and on Form 1040, line 58. See Paul's filled-in Form 5329, later.

Excess Contributions Withdrawn by Due Date of Return

You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.

How to treat withdrawn contributions.   Do not include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both of the following conditions are met.
  • No deduction was allowed for the excess contribution.

  • You withdraw the interest or other income earned on the excess contribution.

You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount.

  

  In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to withdraw, you can use the same method that was used in Worksheet 1-3, earlier.

If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you reported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed).

How to treat withdrawn interest or other income.   You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discussed later.

Form 1099-R.   You will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable.

Example.

Maria, age 35, made an excess contribution in 2013 of $1,000, which she withdrew by April 15, 2014, the due date of her return. At the same time, she also withdrew the $50 income that was earned on the $1,000. She must include the $50 in her gross income for 2013 (the year in which the excess contribution was made). She must also pay an additional tax of $5 (the 10% additional tax on early distributions because she is not yet 59½ years old), but she does not have to report the excess contribution as income or pay the 6% excise tax. Maria receives a Form 1099-R showing that the earnings are taxable for 2013.

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Form 5329, page 1 Paul Jones

Excess Contributions Withdrawn After Due Date of Return

In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.

  • Total contributions (other than rollover contributions) for 2013 to your IRA were not more than $5,500 ($6,500 if you are age 50 or older).

  • You did not take a deduction for the excess contribution being withdrawn.

The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.

Excess contribution deducted in an earlier year.   If you deducted an excess contribution in an earlier year for which the total contributions were not more than the maximum deductible amount for that year (see the following table), you can still remove the excess from your traditional IRA and not include it in your gross income. To do this, file Form 1040X, Amended U.S. Individual Income Tax Return, for that year and do not deduct the excess contribution on the amended return. Generally, you can file an amended return within 3 years after you filed your return, or 2 years from the time the tax was paid, whichever is later.
Year(s) Contribution Limit Contribution limit if age 50 or older at the end of the year
2008 through 2012 $5,000 $6,000
2006 or 2007 $4,000 $5,000
2005 $4,000 $4,500
2002 through 2004 $3,000 $3,500
1997 through 2001 $2,000
before 1997 $2,250

Excess due to incorrect rollover information.   If an excess contribution in your traditional IRA is the result of a rollover and the excess occurred because the information the plan was required to give you was incorrect, you can withdraw the excess contribution. The limits mentioned above are increased by the amount of the excess that is due to the incorrect information. You will have to amend your return for the year in which the excess occurred to correct the reporting of the rollover amounts in that year. Do not include in your gross income the part of the excess contribution caused by the incorrect information.

Deducting an Excess Contribution in a Later Year

You cannot apply an excess contribution to an earlier year even if you contributed less than the maximum amount allowable for the earlier year. However, you may be able to apply it to a later year if the contributions for that later year are less than the maximum allowed for that year.

You can deduct excess contributions for previous years that are still in your traditional IRA. The amount you can deduct this year is the lesser of the following two amounts.

  • Your maximum IRA deduction for this year minus any amounts contributed to your traditional IRAs for this year.

  • The total excess contributions in your IRAs at the beginning of this year.

This method lets you avoid making a withdrawal. It does not, however, let you avoid the 6% tax on any excess contributions remaining at the end of a tax year.

To figure the amount of excess contributions for previous years that you can deduct this year, see Worksheet 1-6 next.

 

Worksheet 1-6. Excess Contributions Deductible This Year

Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year.

1. Maximum IRA deduction for the current year 1.  
2. IRA contributions for the current year 2.  
3. Subtract line 2 from line 1. If zero (0) or less, enter zero 3.  
4. Excess contributions in IRA at beginning of year 4.  
5. Enter the lesser of line 3 or line 4. This is the amount of excess contributions for previous years that you can deduct this year 5.  

Example.

Teri was entitled to contribute to her traditional IRA and deduct $1,000 in 2012 and $1,500 in 2013 (the amounts of her taxable compensation for these years). For 2012, she actually contributed $1,400 but could deduct only $1,000. In 2012, $400 is an excess contribution subject to the 6% tax. However, she would not have to pay the 6% tax if she withdrew the excess (including any earnings) before the due date of her 2012 return. Because Teri did not withdraw the excess, she owes excise tax of $24 for 2012. To avoid the excise tax for 2013, she can correct the $400 excess amount from 2012 in 2013 if her actual contributions are only $1,100 for 2013 (the allowable deductible contribution of $1,500 minus the $400 excess from 2012 she wants to treat as a deductible contribution in 2013). Teri can deduct $1,500 in 2013 (the $1,100 actually contributed plus the $400 excess contribution from 2012). This is shown on Worksheet 1-6. Example—Illustrated next.

 

Worksheet 1-6. Example—Illustrated

Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year.

1. Maximum IRA deduction for the current year 1. 1,500
2. IRA contributions for the current year 2. 1,100
3. Subtract line 2 from line 1. If zero (0) or less, enter zero 3. 400
4. Excess contributions in IRA at beginning of year 4. 400
5. Enter the lesser of line 3 or line 4. This is the amount of excess contributions for previous years that you can deduct this year 5. 400

Closed tax year.   A special rule applies if you incorrectly deducted part of the excess contribution in a closed tax year (one for which the period to assess a tax deficiency has expired). The amount allowable as a traditional IRA deduction for a later correction year (the year you contribute less than the allowable amount) must be reduced by the amount of the excess contribution deducted in the closed year.

  To figure the amount of excess contributions for previous years that you can deduct this year if you incorrectly deducted part of the excess contribution in a closed tax year, see Worksheet 1-7 next.

Worksheet 1-7. Excess Contributions Deductible This Year if Any Were Deducted in a Closed Tax Year

Use this worksheet to figure the amount of excess contributions for prior years that you can deduct this year if you incorrectly deducted excess contributions in a closed tax year.

1. Maximum IRA deduction for the current year 1.  
2. IRA contributions for the current year 2.  
3. If line 2 is less than line 1, enter any excess contributions that were deducted in a closed tax year. Otherwise, enter zero (0) 3.  
4. Subtract line 3 from line 1 4.  
5. Subtract line 2 from line 4. If zero (0) or less, enter zero 5.  
6. Excess contributions in IRA at beginning of year 6.  
7. Enter the lesser of line 5 or line 6. This is the amount of excess contributions for previous years that you can deduct this year 7.  

Early Distributions

You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later.

Early distributions defined.   Early distributions generally are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½.

Age 59½ Rule

Generally, if you are under age 59½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions.

The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.

A number of exceptions to this rule are discussed later under Exceptions. Also see Contributions Returned Before Due Date of Return , earlier.

You may have to pay a 25%, rather than a 10%, additional tax if you receive distributions from a SIMPLE IRA before you are age 59½. See Additional Tax on Early Distributions under When Can You Withdraw or Use Assets? in chapter 3.

After age 59½ and before age 70½.   After you reach age 59½, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 59½, distributions are not required until you reach age 70½. See When Must You Withdraw Assets? (Required Minimum Distributions) , earlier.

Exceptions

There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.

  • You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1949) of your adjusted gross income.

  • The distributions are not more than the cost of your medical insurance due to a period of unemployment.

  • You are totally and permanently disabled.

  • You are the beneficiary of a deceased IRA owner.

  • You are receiving distributions in the form of an annuity.

  • The distributions are not more than your qualified higher education expenses.

  • You use the distributions to buy, build, or rebuild a first home.

  • The distribution is due to an IRS levy of the qualified plan.

  • The distribution is a qualified reservist distribution.

Most of these exceptions are explained below.

Note.

Distributions that are timely and properly rolled over, as discussed earlier, are not subject to either regular income tax or the 10% additional tax. Certain withdrawals of excess contributions after the due date of your return are also tax free and therefore not subject to the 10% additional tax. (See Excess Contributions Withdrawn After Due Date of Return , earlier.) This also applies to transfers incident to divorce, as discussed earlier under Can You Move Retirement Plan Assets .

Receivership distributions.   Early distributions (with or without your consent) from savings institutions placed in receivership are subject to this tax unless one of the above exceptions applies. This is true even if the distribution is from a receiver that is a state agency.

Unreimbursed medical expenses.   Even if you are under age 59½, you do not have to pay the 10% additional tax on distributions that are not more than:
  • The amount you paid for unreimbursed medical expenses during the year of the distribution, minus

  • 10% (or 7.5% if you or your spouse was born before January 2, 1949) of your adjusted gross income (defined next) for the year of the distribution.

You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A (Form 1040). You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax.

Adjusted gross income.   This is the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37.

Medical insurance.   Even if you are under age 59½, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply.
  • You lost your job.

  • You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.

  • You receive the distributions during either the year you received the unemployment compensation or the following year.

  • You receive the distributions no later than 60 days after you have been reemployed.

Disabled.   If you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax.

  You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

Beneficiary.   If you die before reaching age 59½, the assets in your traditional IRA can be distributed to your beneficiary or to your estate without either having to pay the 10% additional tax.

  However, if you inherit a traditional IRA from your deceased spouse and elect to treat it as your own (as discussed under What if You Inherit an IRA , earlier), any distribution you later receive before you reach age 59½ may be subject to the 10% additional tax.

Annuity.   You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59½. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The “required minimum distribution method,” when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.

  There are two other IRS-approved distribution methods that you can use. They are generally referred to as the “fixed amortization method” and the “fixed annuitization method.” These two methods are not discussed in this publication because they are more complex and generally require professional assistance. For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at www.irs.gov/pub/irs-irbs/irb02-42.pdf.

Recapture tax for changes in distribution method under equal payment exception.   You may have to pay an early distribution recapture tax if, before you reach age 59½, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that would not have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period.

   You may have to pay the recapture tax if you do not receive the payments for at least 5 years under a method that qualifies for the exception. You may have to pay it even if you modify your method of distribution after you reach age 59½. In that case, the tax applies only to payments distributed before you reach age 59½.

  Report the recapture tax and interest on line 4 of Form 5329. Attach an explanation to the form. Do not write the explanation next to the line or enter any amount for the recapture on lines 1 or 3 of the form.

One-time switch.   If you are receiving a series of substantially equal periodic payments, you can make a one-time switch to the required minimum distribution method at any time without incurring the additional tax. Once a change is made, you must follow the required minimum distribution method in all subsequent years.

Higher education expenses.   Even if you are under age 59½, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined next) for the year for education furnished at an eligible educational institution (defined below). The education must be for you, your spouse, or the children or grandchildren of you or your spouse.

  When determining the amount of the distribution that is not subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds.
  • Payment for services, such as wages.

  • A loan.

  • A gift.

  • An inheritance given to either the student or the individual making the withdrawal.

  • A withdrawal from personal savings (including savings from a qualified tuition program).

Do not include expenses paid with any of the following funds.
  • Tax-free distributions from a Coverdell education savings account.

  • Tax-free part of scholarships and fellowships.

  • Pell grants.

  • Employer-provided educational assistance.

  • Veterans' educational assistance.

  • Any other tax-free payment (other than a gift or inheritance) received as educational assistance.

Qualified higher education expenses.   Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.

Eligible educational institution.   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

For more information, see chapter 9 of Publication 970, Tax Benefits for Education.

First home.   Even if you are under age 59½, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.
  1. It must be used to pay qualified acquisition costs (defined next) before the close of the 120th day after the day you received it.

  2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined below) who is any of the following.

    1. Yourself.

    2. Your spouse.

    3. Your or your spouse's child.

    4. Your or your spouse's grandchild.

    5. Your or your spouse's parent or other ancestor.

  3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.

  
If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs.   Qualified acquisition costs include the following items.
  • Costs of buying, building, or rebuilding a home.

  • Any usual or reasonable settlement, financing, or other closing costs.

First-time homebuyer.   Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

Date of acquisition.   The date of acquisition is the date that:
  • You enter into a binding contract to buy the main home for which the distribution is being used, or

  • The building or rebuilding of the main home for which the distribution is being used begins.

If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you generally can contribute the amount of the distribution to an IRA within 120 days of the distribution. This contribution is treated as a rollover contribution to the IRA.

Qualified reservist distributions.   A qualified reservist distribution is not subject to the additional tax on early distributions.

Definition.   A distribution you receive is a qualified reservist distribution if the following requirements are met.
  • You were ordered or called to active duty after September 11, 2001.

  • You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component.

  • The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement.

  • The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period.

Reserve component.   The term “reserve component” means the:
  • Army National Guard of the United States,

  • Army Reserve,

  • Naval Reserve,

  • Marine Corps Reserve,

  • Air National Guard of the United States,

  • Air Force Reserve,

  • Coast Guard Reserve, or

  • Reserve Corps of the Public Health Service.

Additional 10% tax

The additional tax on early distributions is 10% of the amount of the early distribution that you must include in your gross income. This tax is in addition to any regular income tax resulting from including the distribution in income.

Use Form 5329 to figure the tax. See the discussion of Form 5329, later, under Reporting Additional Taxes for information on filing the form.

Example.

Tom Jones, who is 35 years old, receives a $3,000 distribution from his traditional IRA account. Tom does not meet any of the exceptions to the 10% additional tax, so the $3,000 is an early distribution. Tom never made any nondeductible contributions to his IRA. He must include the $3,000 in his gross income for the year of the distribution and pay income tax on it. Tom must also pay an additional tax of $300 (10% × $3,000). He files Form 5329. See the filled-in Form 5329, later.

Early distributions of funds from a SIMPLE retirement account made within 2 years of beginning participation in the SIMPLE are subject to a 25%, rather than a 10%, early distributions tax.

Nondeductible contributions.   The tax on early distributions does not apply to the part of a distribution that represents a return of your nondeductible contributions (basis).

Excess Accumulations (Insufficient Distributions)

You cannot keep amounts in your traditional IRA indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 70½. The required minimum distribution for any year after the year in which you reach age 70½ must be made by December 31 of that later year.

Tax on excess.   If distributions are less than the required minimum distribution for the year, discussed earlier under When Must You Withdraw Assets? (Required Minimum Distributions) , you may have to pay a 50% excise tax for that year on the amount not distributed as required.

Reporting the tax.   Use Form 5329 to report the tax on excess accumulations. See the discussion of Form 5329, later, under Reporting Additional Taxes , for more information on filing the form.

Request to waive the tax.   If the excess accumulation is due to reasonable error, and you have taken, or are taking, steps to remedy the insufficient distribution, you can request that the tax be waived. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329 as instructed under Waiver of tax in the Instructions for Form 5329.

Exemption from tax.   If you are unable to take required distributions because you have a traditional IRA invested in a contract issued by an insurance company that is in state insurer delinquency proceedings, the 50% excise tax does not apply if the conditions and requirements of Revenue Procedure 92-10 are satisfied. Those conditions and requirements are summarized below. Revenue Procedure 92-10 is in Cumulative Bulletin 1992-1. To obtain a copy of this revenue procedure, see Mail in chapter 5, How to Get Tax Help, later. You can also read the revenue procedure at most IRS offices, at many public libraries, and online at IRS.gov.

Conditions.   To qualify for exemption from the tax, the assets in your traditional IRA must include an affected investment. Also, the amount of your required distribution must be determined as discussed earlier under When Must You Withdraw Assets? (Required Minimum Distributions) .

Affected investment defined.   Affected investment means an annuity contract or a guaranteed investment contract (with an insurance company) for which payments under the terms of the contract have been reduced or suspended because of state insurer delinquency proceedings against the contracting insurance company.

Requirements.   If your traditional IRA (or IRAs) includes assets other than your affected investment, all traditional IRA assets, including the available portion of your affected investment, must be used to satisfy as much as possible of your IRA distribution requirement. If the affected investment is the only asset in your IRA, as much of the required distribution as possible must come from the available portion, if any, of your affected investment.

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Form 5329, page 1 Tom Jones

Available portion.   The available portion of your affected investment is the amount of payments remaining after they have been reduced or suspended because of state insurer delinquency proceedings.

Make up of shortfall in distribution.   If the payments to you under the contract increase because all or part of the reduction or suspension is canceled, you must make up the amount of any shortfall in a prior distribution because of the proceedings. You make up (reduce or eliminate) the shortfall with the increased payments you receive.

  You must make up the shortfall by December 31 of the calendar year following the year that you receive increased payments.

Reporting Additional Taxes

Generally, you must use Form 5329 to report the tax on excess contributions, early distributions, and excess accumulations. If you must file Form 5329, you cannot use Form 1040A, Form 1040EZ, or Form 1040NR-EZ.

Filing a tax return.   If you must file an individual income tax return, complete Form 5329 and attach it to your Form 1040 or Form 1040NR. Enter the total additional taxes due on Form 1040, line 58, or on Form 1040NR, line 56.

Not filing a tax return.   If you do not have to file a return, but do have to pay one of the additional taxes mentioned earlier, file the completed Form 5329 with the IRS at the time and place you would have filed Form 1040 or Form 1040NR. Be sure to include your address on page 1 and your signature and date on page 2. Enclose, but do not attach, a check or money order payable to the United States Treasury for the tax you owe, as shown on Form 5329. Write your social security number and “2013 Form 5329” on your check or money order.

Form 5329 not required.   You do not have to use Form 5329 if either of the following situations exists.
  • Distribution code 1 (early distribution) is correctly shown in box 7 of Form 1099-R. If you do not owe any other additional tax on a distribution, multiply the taxable part of the early distribution by 10% and enter the result on Form 1040, line 58, or on Form 1040NR, line 56. Put “No” to the left of the line to indicate that you do not have to file Form 5329. However, if you owe this tax and also owe any other additional tax on a distribution, do not enter this 10% additional tax directly on your Form 1040 or Form 1040NR. You must file Form 5329 to report your additional taxes.

  • If you rolled over part or all of a distribution from a qualified retirement plan, the part rolled over is not subject to the tax on early distributions.


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