Topic 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.

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 are not taxed until distributed to you. IRAs cannot be owned jointly. However, any amounts remaining in your IRA upon your death will be paid to your beneficiary or beneficiaries.

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 does not 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.

Figure your allowable deduction using the worksheets in the Form 1040 Instructions (PDF), Form 1040A Instructions (PDF) or in Publication 590-A (PDF), Contributions to Individual Retirement Arrangements (IRAs). You cannot claim an IRA deduction on Form 1040EZ (PDF), Income Tax Return for Single and Joint Filers With No Dependents; you must use either Form 1040A (PDF) or Form 1040 (PDF), U.S. Individual Income Tax Return. If you made nondeductible contributions to a traditional IRA, you need to attach Form 8606 (PDF), Nondeductible IRAs. Use Form 8880 (PDF), Credit for Qualified Retirement Savings Contributions, to determine whether you are also eligible for a tax credit. Enter the amount of the credit on either Form 1040A or Form 1040. You cannot use Form 1040EZ to claim this credit.

Distributions from a traditional IRA are fully or partially taxable in the year of distribution. If you made only deductible contributions, distributions are fully taxable. Use Form 8606 to figure the taxable portion of withdrawals.

Distributions made prior to age 59½ may be subject to a 10% additional tax. You may also owe an excise tax if you do not begin to withdraw minimum distributions by April 1 of the year after 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 (PDF) for exceptions to the additional taxes.

A Roth IRA differs from a traditional IRA in several respects. Contributions to a Roth IRA are not deductible (and you do not report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions are not subject to tax. In addition, you do not 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 is set up. For more information on Roth IRA contributions, refer to Topic 309.

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).

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Page Last Reviewed or Updated: May 27, 2015