Topic No. 451 Individual Retirement Arrangements (IRAs)

Topic Number 451 - Individual Retirement Arrangements (IRAs)

An individual retirement arrangement (IRA) is a tax-favored personal savings arrangement, which allows you to set aside money for retirement. There are several different types of IRAs, including traditional IRAs and Roth IRAs. You can set up an IRA with a bank, insurance company, or other financial institution.

Traditional IRAs

You may be able to deduct some or all of your contributions to a traditional IRA. You may also be eligible for a tax credit equal to a percentage of your contribution. Amounts in your traditional IRA, including earnings, generally aren't taxed until distributed to you. IRAs can't be owned jointly. However, any amounts remaining in your IRA upon your death will be paid to your beneficiary or beneficiaries.

Contributions

To contribute to a traditional IRA, you must be under age 70½ at the end of the tax year. You, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes. Compensation doesn't include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation.

You can figure your allowable deduction using the worksheets in the Form 1040 Instructions or in Publication 590-A.pdf, Contributions to Individual Retirement Arrangements (IRAs) and claim your IRA deduction on Form 1040.pdf, U.S. Individual Income Tax Return (attach Form 1040, Schedule 1.pdf, Additional Income and Adjustments to Income). If you made nondeductible contributions to a traditional IRA, you must attach Form 8606.pdf, Nondeductible IRAs.

Use Form 8880.pdf, Credit for Qualified Retirement Savings Contributions and Do I Qualify for the Retirement Savings Contributions Credit? to determine whether you're also eligible for a tax credit. Enter the amount of the credit on Form 1040 (attach Form 1040, Schedule 3.pdf, Nonrefundable Credits).

Distributions

Distributions from a traditional IRA are fully or partially taxable in the year of distribution. To determine if your IRA is taxable, see Is the Distribution from My Traditional, SEP or SIMPLE IRA Taxable? If you made only deductible contributions, distributions are fully taxable. Use Form 8606 to figure the taxable portion of withdrawals when the traditional IRA contains nondeductible contributions.

Early Distributions

Distributions made prior to age 59½ may be subject to an additional 10% tax. You may also owe an excise tax if you don't begin to withdraw minimum distributions by April 1 of the year after the year you reach age 70½. These additional taxes are figured and reported on Form 5329.pdf, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Refer to the Form 5329 Instructions, Topic No. 557 and Do I Meet an Exception to the Additional Tax on Early Distributions from IRAs or Retirement Plans? for exceptions to the additional taxes.

Roth IRAs

A Roth IRA differs from a traditional IRA in several ways. Contributions to a Roth IRA aren't deductible (and you don't report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions aren't subject to tax. In addition, you don't have to be under age 70½ to contribute to a Roth IRA. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it's set up. For more information on Roth IRA contributions, refer to Topic No. 309 and to determine if your Roth IRA is taxable, see Is the Distribution from My Roth Account Taxable?

Additional Information

For additional information on the different types of IRAs, including information on contributions, distributions, as well as conversions from one type of IRA to another, refer to Publication 590-A.pdf, Contributions to Individual Retirement Arrangements (IRAs) and Publication 590-B.pdf, Distributions from Individual Retirement Arrangements (IRAs).