Table of Contents
- What's New for 2008
- What's New for 2009
- Reminders
- Introduction
- Useful Items - You may want to see:
- Traditional IRAs
- What Is a Traditional IRA?
- Who Can Set Up a Traditional IRA?
- When and How Can a Traditional IRA Be Set Up?
- How Much Can Be Contributed?
- When Can Contributions Be Made?
- How Much Can You Deduct?
- Nondeductible Contributions
- Inherited IRAs
- Can You Move Retirement Plan Assets?
- When Can You Withdraw or Use IRA Assets?
- When Must You Withdraw IRA Assets? (Required Minimum Distributions)
- Are Distributions Taxable?
- What Acts Result in Penalties or Additional Taxes?
- Roth IRAs
Traditional IRA contribution and deduction limit. The contribution limit to your traditional IRA for 2008 increased to the smaller of the following amounts:
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$5,000, or
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Your taxable compensation for the year.
If you were age 50 or older before 2009, the most that can be contributed to your traditional IRA for 2008 is the smaller of the following amounts:
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$6,000, or
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Your taxable compensation for the year.
For more information, see How Much Can Be Contributed? later.
Roth IRA contribution limit. If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2008 is generally the lesser of:
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$5,000, or
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Your taxable compensation for the year.
If you were age 50 or older before 2009 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2008 is generally the lesser of:
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$6,000, or
-
Your taxable compensation for the year.
However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? later.
Modified AGI limit for traditional IRA contributions increased. For 2008, 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 adjusted gross income (AGI) is:
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More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifying widow(er),
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More than $53,000 but less than $63,000 for a single individual or head of household, or
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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 AGI is more than $159,000 but less than $169,000. If your AGI is $169,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? later.
Modified AGI limit for Roth IRA contributions increased. For 2008, your Roth IRA contribution limit is reduced (phased out) in the following situations.
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Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $159,000. You cannot make a Roth IRA contribution if your modified AGI is $169,000 or more.
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Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2008, and your modified AGI is at least $101,000. You cannot make a Roth IRA contribution if your modified AGI is $116,000 or more.
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Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
See Can You Contribute to a Roth IRA? later.
Rollovers from qualified retirement plans. Beginning in 2008, you can roll over (convert) amounts from a qualified retirement plan to a Roth IRA. For more information, see Rollover from an employer's plan into a Roth IRA , later.
Economic stimulus payments. Economic stimulus payments directly deposited in your IRA or other tax-favored account in 2008 may be withdrawn tax-free and penalty-free. For more information, see Tax-Free Withdrawals of Economic Stimulus Payments , later.
Military death gratuities and servicemembers' group life insurance (SGLI) payments. If you received a military death gratuity or SGLI payment with respect to a death from an injury that occurred after October 6, 2001, you may roll over some or all of the amount received to your Roth IRA. For more information, see Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments in chapter 2 of Publication 590.
Tax relief for the Kansas disaster area. Special rules may apply if you received a distribution from your IRA and your main home was located in the Kansas disaster area on the date the disaster occurred, and you sustained an economic loss due to the storms and tornadoes.Special rules may also apply if you received a distribution to purchase or construct a main home in the Kansas disaster area, but the home was not purchased or constructed because of the storms and tornadoes.For more information, see Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes.
Tax relief for the Midwestern disaster areas. Special rules may apply if you received a distribution from your IRA and your main home was located in a Midwestern disaster area on the date the disaster occurred, and you sustained an economic loss due to the severe storms, tornadoes, or flooding.Special rules may also apply if you received a distribution to purchase or construct a main home in a Midwestern disaster area, but the home was not purchased or constructed because of the severe storms, tornadoes, or flooding.For more information, see chapter 4 of Publication 590.
Qualified settlement income. If you received qualified settlement income in connection with the Exxon Valdez litigation, you may roll over the amount received, or part of the amount received, to your traditional or Roth IRA. For more information, see Qualified settlement income in chapter 1 of Publication 590.
Modified AGI limit for traditional IRA contributions increased. For 2009, 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 adjusted gross income (AGI) is:
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More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),
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More than $55,000 but less than $65,000 for a single individual or head of household, or
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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 AGI is more than $166,000 but less than $176,000. If your AGI is $176,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? later.
Modified AGI limit for Roth IRA contributions increased. For 2009, your Roth IRA contribution limit is reduced (phased out) in the following situations.
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Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 or more.
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Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2009 and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.
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Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
See Can You Contribute to a Roth IRA? later.
Contributions to both traditional and Roth IRAs. For information on your combined contribution limit if you contribute to both traditional and Roth IRAs, see Roth IRAs and traditional IRAs under How Much Can Be Contributed? later.
Statement of required minimum distribution. If a minimum distribution is required from your IRA, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the required minimum distribution to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31 of the year in which the minimum distribution is required. It can be provided with the year-end fair market value statement that you normally get each year. No report is required for IRAs of owners who have died.
IRA interest. Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. Do not report this interest on your tax return as tax-exempt interest.
Form 8606. To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRAs.
Hurricane tax relief. Special rules apply to the use of retirement funds (including IRAs) by qualified individuals who suffered an economic loss as a result of Hurricane Katrina, Rita, or Wilma. While qualified hurricane distributions can no longer be made, special rules apply to the repayments of these distributions. See Hurricane-Related Relief in chapter 4 of Publication 590. The term “50 or older” is used several times in this chapter. It refers to an IRA owner who is age 50 or older by the end of the tax year.
An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement.
This chapter discusses the following topics.
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The rules for a traditional IRA (any IRA that is not a Roth or SIMPLE IRA).
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The Roth IRA, which features nondeductible contributions and tax-free distributions.
Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs) are not discussed in this chapter. For more information on these plans and employees' SEP IRAs and SIMPLE IRAs that are part of these plans, see Publications 560 and 590.
For information about contributions, deductions, withdrawals, transfers, rollovers, and other transactions for 2009, see Publication 590.
Publication
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560 Retirement Plans for Small Business
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590 Individual Retirement Arrangements (IRAs)
Form (and Instructions)
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5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts
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8606 Nondeductible IRAs
In this chapter the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA.” Two advantages of a traditional IRA are:
You can set up and make contributions to a traditional IRA if:
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You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
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You were not age 70½ by the end of the year.
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The deduction for contributions made on your behalf to retirement plans, and
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The deduction allowed for one-half of your self-employment taxes.
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Earnings and profits from property, such as rental income, interest income, and dividend income.
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Pension or annuity income.
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Deferred compensation received (compensation payments postponed from a past year).
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Income from a partnership for which you do not provide services that are a material income-producing factor.
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Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.
You can set up a traditional IRA at any time. However, the time for making contributions for any year is limited. See When Can Contributions Be Made, later.
You can set up different kinds of IRAs with a variety of organizations. You can set up an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also set up an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements.
There are limits and other rules that affect the amount that can be contributed to a traditional IRA. These limits and other rules are explained below.
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$5,000 ($6,000 if you are 50 or older).
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Your taxable compensation (defined earlier) for the year.
Example 1.
Betty, who is 34 years old and single, earned $24,000 in 2008. Her IRA contributions for 2008 are limited to $5,000.
Example 2.
John, an unmarried college student working part time, earned $3,500 in 2008. His IRA contributions for 2008 are limited to $3,500, the amount of his compensation.
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$5,000 ($6,000 if you are 50 or older).
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The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.
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Your spouse's IRA contribution for the year to a traditional IRA.
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Any contribution for the year to a Roth IRA on behalf of your spouse.
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As soon as you set up 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.
Generally, you can deduct the lesser of:
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 eligible to claim a credit for contributions to your traditional IRA. For more information, see chapter 37.-
$5,000 ($6,000 if you are 50 or older in 2008, or $8,000 for certain employer bankruptcies).
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100% of your compensation.
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$5,000 ($6,000 if you are 50 or older in 2008, or $8,000 for certain employer bankruptcies).
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The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts.
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The IRA deduction for the year of the spouse with the greater compensation.
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Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation.
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Any contributions for the year to a Roth IRA on behalf of the spouse with the greater 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 contributions to your own IRA. Your deductions are subject to the rules for single individuals.
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.
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.
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Declined to participate in the plan,
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Did not make a required contribution, or
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Did not perform the minimum service required to accrue a benefit for the year.
Unless you are covered under another employer plan, you are not covered by an employer plan if you are in one of the situations described below.
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The plan you participate in is established for its employees by:
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The United States,
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A state or political subdivision of a state, or
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An instrumentality of either (a) or (b) above.
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-
You did not serve more than 90 days on active duty during the year (not counting duty for training).
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The plan you participate in is established for its employees by:
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The United States,
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A state or political subdivision of a state, or
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An instrumentality of either (a) or (b) above.
-
-
Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement.
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 phaseout, you must determine your modified adjusted gross income (AGI) and your filing status. See Filing status and Modified adjusted gross income (AGI) , later. Then use Table 17-1 or 17-2 to determine if the phaseout applies.
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You received social security benefits.
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You received taxable compensation.
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Contributions were made to your traditional IRA.
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You or your spouse was covered by an employer retirement plan.
Table 17-1.Effect of Modified AGI1 on Deduction if You Are Covered by 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 AGI is... | THEN you can take... | ||
---|---|---|---|---|
single or head of household |
$53,000 or less | a full deduction. | ||
more than $53,000 but less than $63,000 |
a partial deduction. | |||
$63,000 or more | no deduction. | |||
married filing jointly or qualifying widow(er) |
$85,000 or less | a full deduction. | ||
more than $85,000 but less than $105,000 |
a partial deduction. | |||
$105,000 or more | no deduction. | |||
married filing separately2 | less than $10,000 | a partial deduction. | ||
$10,000 or more | no deduction. |
1Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI) . |
2If 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” column). |
Table 17-2.Effect of Modified AGI1 on Deduction if You Are NOT Covered by Retirement Plan at Work
If you are not covered by a retirement plan at work, use this table to determine
|
IF your filing status is... | AND your 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 | $159,000 or less | a full deduction. | ||
more than $159,000 but less than $169,000 |
a partial deduction. | |||
$169,000 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. |
1Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI) . |
2You are entitled to the full deduction if you did not live with your spouse at any time during the year. |
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IRA deduction.
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Student loan interest deduction.
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Tuition and fees deduction.
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Domestic production activities deduction.
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Foreign earned income exclusion.
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Foreign housing exclusion or deduction.
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Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 (For Filers With Qualified Higher Education Expenses).
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Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses.
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IRA deduction.
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Student loan interest deduction.
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Tuition and fees deduction.
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Exclusion of qualified savings bond interest shown on Form 8815.
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You received distributions in 2008 from one or more traditional IRAs.
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You made contributions to a traditional IRA for 2008.
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Some of those contributions may be nondeductible 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. You cannot deduct IRA contributions on Form 1040EZ.
Worksheet 17-1.Figuring Your Modified AGI
Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes.
|
1. | Enter your adjusted gross income (AGI) from Form 1040, line 38; or Form 1040A, line 22 | 1. | |
2. | Enter any traditional IRA deduction from Form 1040, line 32; or Form 1040A, line 17 | 2. | |
3. | Enter any student loan interest deduction from Form 1040, line 33; or Form 1040A, line 18 | 3. | |
4. | Enter any tuition and fees deduction from Form 1040, line 34; or Form 1040A, line 19 | 4. | |
5. | Enter any domestic production activities deduction from Form 1040, line 35 | 5. | |
6. | Enter any foreign earned income and/or housing exclusion from Form 2555, line 45; or Form 2555-EZ, line 18 | 6. | |
7. | Enter any foreign housing deduction from Form 2555, line 50 | 7. | |
8. | Enter any excludable savings bond interest from Form 8815, line 14 | 8. | |
9. | Enter any excluded employer-provided adoption benefits from Form 8839, line 30 | 9. | |
10. | Add lines 1 through 9. This is your Modified AGI for traditional IRA purposes | 10. |
Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA up to the general limit or, if it applies, the spousal IRA limit. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution.
Example.
Mike is 28 years old and single. In 2008, he was covered by a retirement plan at work. His salary was $57,312. His modified AGI was $65,000. Mike made a $5,000 IRA contribution for 2008. Because he was covered by a retirement plan and his modified AGI was over $63,000, he cannot deduct his $5,000 IRA contribution. He must designate this contribution as a nondeductible contribution by reporting it on Form 8606, as explained next.
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.
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Treat it as your own IRA by designating yourself as the account owner.
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Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:
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Qualified employer plan,
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Qualified employee annuity plan (section 403(a) plan),
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Tax-sheltered annuity plan (section 403(b) plan), or
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Deferred compensation plan of a state or local government (section 457 plan).
-
-
Treat yourself as the beneficiary rather than treating the IRA as your own.
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Contributions (including rollover contributions) are made to the inherited IRA, or
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You do not take the required minimum distribution for a year as a beneficiary of the IRA.
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You are the sole beneficiary of the IRA, and
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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 the discussion of inherited IRAs under Rollover From One IRA Into Another, later.
You can transfer, tax free, assets (money or property) from other retirement plans (including traditional IRAs) to a traditional IRA. You can make the following kinds of transfers.
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Transfers from one trustee to another.
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Rollovers.
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Transfers incident to a divorce.
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, discussed later under Rollover From One IRA Into Another . For information about direct transfers to IRAs from retirement plans other than IRAs, see Publication 590.
Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute (roll over) 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.
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 more information, see Publication 590.
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.
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.
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It is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution.
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It was not initiated by either the custodial institution or the depositor.
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It was made because:
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The custodial institution is insolvent, and
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The receiver is unable to find a buyer for the institution.
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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):
A qualified plan is one that meets the requirements of the Internal Revenue Code.
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A required minimum distribution (explained later under When Must You Withdraw IRA Assets? (Required Minimum Distributions).
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Hardship distributions.
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Any of a series of substantially equal periodic distributions paid at least once a year over:
-
Your lifetime or life expectancy,
-
The lifetimes or life expectancies of you and your beneficiary, or
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A period of 10 years or more.
-
-
Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains.
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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.
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Dividends on employer securities.
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The cost of life insurance coverage.
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 detailed information, see Publication 590.
You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.
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Your modified AGI (explained later under Roth IRAs ) is not more than $100,000.
-
You are not a married individual filing a separate return.
Note.
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.
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. More detailed information is in Publication 590.
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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.
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Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.
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The type and amount of the contribution to the first IRA that is to be recharacterized.
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The date on which the contribution was made to the first IRA and the year for which it was made.
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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.
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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.
There are rules limiting use of your IRA assets and distributions from it. Violation of the rules generally results in additional taxes in the year of violation. See What Acts Result in Penalties or Additional Taxes, later.
-
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.
If you received an economic stimulus payment in 2008 that was directly deposited to your traditional IRA, you can choose to treat the payment either as a 2008 contribution (subject to traditional IRA contribution and deduction limits), or you may choose to withdraw all or part of the payment. If you choose to withdraw the payment, or a portion of the payment, that portion is treated as neither contributed to nor distributed from your IRA. The amount withdrawn is not included in your income and is not subject to additional tax or penalty. The withdrawal must be made by the due date for filing your 2008 tax return, including extensions. For most people that would be April 15, 2009.
If you do withdraw all or part of the payment from your IRA, you will receive a Form 1099-R showing the amount of the distribution. Include the distribution on Form 1040, line 16a; or Form 1040A, line 12a. Do not make an entry on Form 1040, line 16b; or Form 1040A, line 12b, but enter “ESP” in the space next to the line. For more information see the instructions for your tax return.
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. The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA.
In general, distributions from a traditional IRA are taxable in the year you receive them.
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Rollovers,
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Qualified charitable distributions, discussed later,
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Tax-free withdrawals of contributions, discussed earlier, and
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The return of nondeductible contributions, discussed later under 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.
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. Send it to the IRS at the time and place you would otherwise file an income tax return.
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.
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Investing in collectibles.
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Making excess contributions.
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Taking early distributions.
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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 a Form 8606, if required.
Generally, a prohibited transaction is any improper use of your traditional IRA by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendent, and any spouse of a lineal descendent).
The following are examples of prohibited transactions with a traditional IRA.
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Borrowing money from it.
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Selling property to it.
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Receiving unreasonable compensation for managing it.
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Using it as security for a loan.
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Buying property for personal use (present or future) with IRA funds.
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.
Generally, an excess contribution is the amount contributed to your traditional IRA(s) for the year that is more than the smaller of the following amounts.
-
The maximum deductible amount for the year. For 2008, this is $5,000 ($6,000 if you are 50 or older, or $8,000 for certain employer bankruptcies).
-
Your taxable compensation for the year.
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No deduction was allowed for the excess contribution.
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You withdraw the interest or other income earned on the excess contribution.
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Total contributions (other than rollover contributions) for 2008 to your IRA were not more than $5,000 ($6,000 if you are 50 or older, or $8,000 for certain employer bankruptcies).
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You did not take a deduction for the excess contribution being withdrawn.
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. See the discussion of Form 5329 under Reporting Additional Taxes, later, to figure and report the tax.
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You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
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The distributions are not more than the cost of your medical insurance.
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You are disabled.
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You are the beneficiary of a deceased IRA owner.
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You are receiving distributions in the form of an annuity.
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The distributions are not more than your qualified higher education expenses.
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You use the distributions to buy, build, or rebuild a first home.
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The distribution is due to an IRS levy of the qualified plan.
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The distribution is a qualified reservist distribution.
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.
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.
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 or Form 1040EZ.
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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 59. 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. You must file Form 5329 to report your additional taxes.
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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.
Regardless of your age, you may be able to establish and make nondeductible contributions to a retirement plan called a Roth IRA.
A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined earlier). It can be either an account or an annuity. Individual retirement accounts and annuities are described in Publication 590.
To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.
Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.
You can set up a Roth IRA at any time. However, the time for making contributions for any year is limited. See When Can You Make Contributions , later under Can You Contribute to a Roth IRA?
Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:
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$169,000 for married filing jointly or qualifying widow(er),
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$116,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, or
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$10,000 for married filing separately and you lived with your spouse at any time during the year.
You may be eligible to claim a credit for contributions to your Roth IRA. For more information, see chapter 37.
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Subtract the following.
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Roth IRA conversions included on Form 1040, line 15b; or Form 1040A, line 11b.
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Roth IRA rollovers from qualified retirement plans included on Form 1040, line 16b; or Form 1040A, line 12b.
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Minimum required distributions from IRAs (for conversions and rollovers from qualified retirement plans only).
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Add the following deductions and exclusions:
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Traditional IRA deduction,
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Student loan interest deduction,
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Tuition and fees deduction,
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Domestic production activities deduction,
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Foreign earned income exclusion,
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Foreign housing exclusion or deduction,
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Exclusion of qualified savings bond interest shown on Form 8815, and
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Exclusion of employer-provided adoption benefits shown on Form 8839.
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Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes.
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1. | Enter your adjusted gross income from Form 1040, line 38; or Form 1040A, line 22 | 1. | ||||||
2. | Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA, a rollover from a qualified retirement plan to a Roth IRA, and a minimum required distribution from an IRA (for conversions and rollovers from qualified retirement plans only) |
2. | ||||||
3. | Subtract line 2 from line 1 | 3. | ||||||
4. | Enter any traditional IRA deduction from Form 1040, line 32; or Form 1040A, line 17 | 4. | ||||||
5. | Enter any student loan interest deduction from Form 1040, line 33; or Form 1040A, line 18 | 5. | ||||||
6. | Enter any tuition and fees deduction from Form 1040, line 34; or Form 1040A, line 19 | 6. | ||||||
7. | Enter any domestic production activities deduction from Form 1040, line 35 | 7. | ||||||
8. | Enter any foreign earned income and/or housing exclusion from Form 2555, line 45; or Form 2555-EZ, line 18 | 8. | ||||||
9. | Enter any foreign housing deduction from Form 2555, line 50 | 9. | ||||||
10. | Enter any excludable savings bond interest from Form 8815, line 14 | 10. | ||||||
11. | Enter any excluded employer-provided adoption benefits from Form 8839, line 30 | 11. | ||||||
12. | Add the amounts on lines 3 through 11 | 12. | ||||||
13. | Enter: •$169,000 if married filing jointly or qualifying widow(er) •$10,000 if married filing separately and you lived with your spouse at any time during the year •$116,000 for all others |
13. | ||||||
If yes, If no, |
Is the amount on line 12 more than the amount on line 13? then see the Note below. then the amount on line 12 is your modified AGI for Roth IRA purposes. |
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Note. If the amount on line 12 is more than the amount on line 13 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. When figuring your modified AGI for conversion purposes, refigure your AGI without taking into account any income from conversions or minimum required distributions from IRAs. (If you receive social security benefits, use Worksheet 1 in Appendix B of Publication 590 to refigure your AGI.) Then go to list item (2) under Modified AGI or line 3 above in Worksheet 17-2 to refigure your modified AGI. If you do not have other income or loss items subject to AGI-based phaseouts, your modified AGI for Roth IRA purposes is the amount on line 12. |
The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.
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$5,000 ($6,000 if you are 50 or older in 2008).
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Your taxable compensation.
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$5,000 ($6,000 if you are 50 or older in 2008) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.
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Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.
Table 17-3.Effect of Modified AGI on Roth IRA Contribution
This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI).
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IF you have taxable compensation and your filing status is... | AND your modified AGI is... |
THEN... | ||
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married filing jointly, or qualifying widow(er) |
less than $159,000 | you can contribute up to $5,000 ($6,000 if you are 50 or older in 2008). | ||
at least $159,000 but less than $169,000 |
the amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. | |||
$169,000 or more | you cannot contribute to a Roth IRA. | |||
married filing separately and you lived with your spouse at any time during the year | zero (-0-) | you can contribute up to $5,000 ($6,000 if you are 50 or older in 2008). | ||
more than zero (-0-) but less than $10,000 |
the amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. | |||
$10,000 or more | you cannot contribute to a Roth IRA. | |||
single, head of household, or married filing separately and you did not live with your spouse at any time during the year |
less than $101,000 | you can contribute up to $5,000 ($6,000 if you are 50 or older in 2008). | ||
at least $101,000 but less than $116,000 |
the amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. | |||
$116,000 or more | you cannot contribute to a Roth IRA. |
You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).
You can make contributions for 2008 by the due date (not including extensions) for filing your 2008 tax return.A 6% excise tax applies to any excess contribution to a Roth IRA.
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Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year, plus
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Any excess contributions for the preceding year, reduced by the total of:
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Any distributions out of your Roth IRAs for the year, plus
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Your contribution limit for the year minus your contributions to all your IRAs for the year.
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You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to roll amounts over from a qualified retirement plan to a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA.
You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described earlier under Rollover From One IRA Into Another under Traditional IRAs, apply to these rollovers. However, the 1-year waiting period does not apply.
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Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
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Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.
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Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.
If, when you converted amounts from a traditional IRA or SIMPLE IRA into a Roth IRA or when you rolled over amounts from a qualified retirement plan into a Roth IRA, you expected to have modified AGI of less than $100,000 and a filing status other than married filing separately, but your expectations did not come true, you have made a failed conversion or failed rollover.
You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. Most of the rules for rollovers, explained earlier under Rollover From One IRA Into Another under Traditional IRAs, apply to these rollovers.
You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering rules for distributions, later.
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It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
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The payment or distribution is:
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