Table of Contents
- What's New for 2011
- What's New for 2012
- Introduction
- Who Can Open a Traditional IRA?
- When Can a Traditional IRA Be Opened?
- How Can a Traditional IRA Be Opened?
- How Much Can Be Contributed?
- When Can Contributions Be Made?
- How Much Can You Deduct?
- What if You Inherit an IRA?
- Can You Move Retirement Plan Assets?
- When Can You Withdraw or Use Assets?
- When Must You Withdraw Assets? (Required Minimum Distributions)
- Are Distributions Taxable?
- January 2011 QCDs treated as made in 2010.
- 2011 Reporting.
- Additional reporting requirements if you made the election to treat a January 2011 QCD as made in 2010.
- One-time transfer.
- Testing period rules apply.
- More information.
- Distributions Fully or Partly Taxable
- Figuring the Nontaxable and Taxable Amounts
- Recognizing Losses on Traditional IRA Investments
- Other Special IRA Distribution Situations
- Reporting and Withholding Requirements for Taxable Amounts
- What Acts Result in Penalties or Additional Taxes?
Due date for contributions and withdrawals. 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. Because April 15, 2012, falls on a Sunday and Emancipation Day, a legal holiday in the District of Columbia, falls on Monday, April 16, 2012, the due date for making contributions for 2011 to your IRA is April 17, 2012. See When Can Contributions Be Made? in this chapter.There is a 6% excise tax on excess contributions not withdrawn by the due date (including extensions) for your return. You will not have to pay the 6% tax if any 2011 excess contributions are withdrawn by April 17, 2012 (including extensions). See Excess Contributions under What Acts Result in Penalties or Additional Taxes? in this chapter.
Modified AGI limit for traditional IRA contributions increased. For 2011, 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 $90,000 but less than $110,000 for a married couple filing a joint return or a qualifying widow(er),
-
More than $56,000 but less than $66,000 for a single individual or head of household, or
-
Less than $10,000 for a married individual filing a separate return.
For 2011, 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 $169,000 but less than $179,000. If your modified AGI is $179,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? in this chapter.
Modified AGI limit for traditional IRA contributions increased. For 2012, 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 $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er),
-
More than $58,000 but less than $68,000 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 $173,000 but less than $183,000. If your modified AGI is $183,000 or more, you cannot take a deduction for contributions to a traditional IRA.
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.
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.
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).
-
The deduction for contributions made on your behalf to retirement plans, and
-
The deduction allowed for the deductible part of your self-employment taxes.
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. |
|
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.
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.
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.
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.
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.
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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.
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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.
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.
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.
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.
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.
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.
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Army National Guard of the United States,
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Army Reserve,
-
Naval Reserve,
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Marine Corps Reserve,
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Air National Guard of the United States,
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Air Force Reserve,
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Coast Guard Reserve, or
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Reserve Corps of the Public Health Service.
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.
For 2011, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:
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 2011. His IRA contributions for 2011 are limited to $5,000.
Danny, an unmarried college student working part time, earns $3,500 in 2011. His IRA contributions for 2011 are limited to $3,500, the amount of his compensation.
For 2011, 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:
-
$5,000 ($6,000 if you are age 50 or older), or
-
The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.
-
Your spouse's IRA contribution for the year to a traditional IRA.
-
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 $10,000 ($11,000 if only one of you is age 50 or older or $12,000 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 was age 50 by the end of 2011. For the year, Carl has taxable compensation of $30,000. He plans to contribute (and deduct) $5,000 to a traditional IRA. If he and Kristin file a joint return, each can contribute $5,000 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 − $5,000 = $25,000), to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $5,000 is her contribution limit, because $5,000 is less than $25,000 (her compensation for purposes of figuring her contribution limit).
Generally, except as discussed above under 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 2011. Because of the spousal IRA limit rule, even though Tom earned less than $6,000, they can contribute up to $6,000 to his IRA for 2011 if they file a joint return. They can contribute up to $6,000 to Darcy's IRA. If they file separate returns, the amount that can be contributed to Tom's IRA is limited to $3,800.
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 2011. Although he can contribute up to $5,000 for 2011, he contributes only $3,000. After April 17, 2012, Rafael cannot make up the difference between his actual contributions for 2011 ($3,000) and his 2011 limit ($5,000). He cannot contribute $2,000 more than the limit for any later year.
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.
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, Direct Deposit of Refund to More Than One Account.
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.
Generally, you can deduct the lesser of:
-
The contributions to your traditional IRA for the year, or
-
The general limit (or the 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 5.
-
$5,000 ($6,000 if you are age 50 or older), or
-
100% of your compensation.
-
$5,000 ($6,000 if the spouse with the lower compensation is age 50 or older), or
-
The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts.
-
The IRA deduction for the year of the spouse with the greater compensation.
-
Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation.
-
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 the 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.
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, 2010. The contribution for the plan year ending on June 30, 2011, is made February 15, 2012. Because an amount is contributed to Bob's account for the plan year, Bob is covered by the plan for his 2011 tax year.
Example.
Mickey was covered by a profit-sharing plan and left the company on December 31, 2010. 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, 2011, no contributions were made that were allocated to the June 30, 2011, 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, 2011, the company decided to contribute to the plan for the plan year ending June 30, 2011. That contribution was made on February 15, 2012. Mickey is an active participant in the plan for his 2012 tax year but not for his 2011 tax year.
-
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.
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, 2010. Because Nick is eligible to participate in the plan for its year ending June 30, 2011, he is covered by the plan for his 2011 tax year.
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.
-
The plan you participate in is established for its employees by:
-
The United States,
-
A state or political subdivision of a state, or
-
An instrumentality of either (a) or (b) above.
-
-
You did not serve more than 90 days on active duty during the year (not counting duty for training).
-
The plan you participate in is established for its employees by:
-
The United States,
-
A state or political subdivision of a state, or
-
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.
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.
Instead of using Table 1-2 or Table 1-3 and Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2011, 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.
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 |
$56,000 or less | a full deduction. |
more than $56,000 but less than $66,000 |
a partial deduction. | |
$66,000 or more | no deduction. | |
married filing jointly or qualifying widow(er) |
$90,000 or less | a full deduction. |
more than $90,000 but less than $110,000 |
a partial deduction. | |
$110,000 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). |
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 |
$169,000 or less | a full deduction. |
more than $169,000 but less than $179,000 |
a partial deduction. | |
$179,000 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 2012, 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 $173,000 but less than $183,000. If your AGI is $183,000 or more, you cannot take a deduction for a contribution to a traditional IRA.
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.
For 2012, 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 $58,000 but less than $68,000 for a single individual (or head of household),
-
More than $92,000 but less than $112,000 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.
-
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.
-
IRA deduction.
-
Student loan interest deduction.
-
Tuition and fees deduction.
-
Exclusion of qualified savings bond interest shown on Form 8815.
-
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.
-
You received distributions in 2011 from one or more traditional IRAs,
-
You made contributions to a traditional IRA for 2011, and
-
Some of those contributions may be nondeductible contributions. (See Nondeductible Contributions and Worksheet 1-2, later.)
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 2011. 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.
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 24 | 8. | |
9. | Add lines 1 through 8. This is your Modified AGI for traditional IRA purposes | 9. |
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.
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 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 2011, he was covered by a retirement plan at work. His salary is $57,312. His modified AGI is $68,000. Tony makes a $5,000 IRA contribution for 2011. Because he was covered by a retirement plan and his modified AGI is above $66,000, he cannot deduct his $5,000 IRA contribution. He must designate this contribution as a nondeductible contribution by reporting it on Form 8606.
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.
Recordkeeping. There is a recordkeeping worksheet, Appendix A, Summary Record of Traditional IRA(s) for 2011 , that you can use to keep a record of deductible and nondeductible IRA contributions.
The following examples illustrate the use of Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2011.
Example 1.
For 2011, 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 $2,000 interest and dividend income, is $93,555. Because their modified AGI is between $90,000 and $110,000 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 2011, Tom contributed $5,000 to his IRA and Betty contributed $5,000 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 $4,120.
He can choose to treat the $4,120 as either deductible or nondeductible contributions. He can either leave the $880 ($5,000 − $4,120) of nondeductible contributions in his IRA or withdraw them by April 17, 2012. He decides to treat the $4,120 as deductible contributions and leave the $880 of nondeductible contributions in his IRA.
Using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2011, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2011—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 $5,000 contribution for 2011 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 2011, because their modified AGI is not within the phaseout range that applies. Betty decides to treat her $5,000 IRA contributions as deductible.
The IRA deductions of $4,120 and $5,000 on the joint return for Tom and Betty total $9,120.
Example 2.
For 2011, 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 $5,000 to his traditional IRA and $5,000 to a traditional IRA for Sue (a 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 $171,555.
Because the combined modified AGI is $110,000 or more, Ed cannot deduct any of the contribution to his traditional IRA. He can either leave the $5,000 of nondeductible contributions in his IRA or withdraw them by April 17, 2012.
Sue figures her IRA deduction as shown on Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2011—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.)
|
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 | $56,000 | $66,000 | ||||
married filing jointly or qualifying widow(er) | $90,000 | $110,000 | |||||
married filing separately | $0 | $10,000 | |||||
are not covered by an employer plan, but your spouse is covered | married filing jointly | $169,000 | $179,000 | ||||
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 . |
|||||||
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 $5,000 ($6,000 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. | ||||||
|
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 2011, but do not enter more than $5,000 ($6,000 if you are age 50 or older). If contributions are more than $5,000 ($6,000 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. |
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.
-
Treat it as your own IRA by designating yourself as the account owner.
-
Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a:
-
Qualified employer plan,
-
Qualified employee annuity plan (section 403(a) plan),
-
Tax-sheltered annuity plan (section 403(b) plan),
-
Deferred compensation plan of a state or local government (section 457 plan), or
-
-
Treat yourself as the beneficiary rather than treating the IRA as your own.
-
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 are the sole beneficiary of the IRA, and
-
You have an unlimited right to withdraw amounts from it.
-
Rollovers , later, under Can You Move Retirement Plan Assets,
-
When Must You Withdraw Assets? (Required Minimum Distributions) , later, and
-
The discussion of IRA beneficiaries, later, under When Must You Withdraw Assets? (Required Minimum Distributions).
(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.)
|
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 | $56,000 | $66,000 | ||||
married filing jointly or qualifying widow(er) | $90,000 | $110,000 | |||||
married filing separately | $0 | $10,000 | |||||
are not covered by an employer plan, but your spouse is covered | married filing jointly | $169,000 | $179,000 | ||||
married filing separately | $0 | $10,000 | |||||
1. | Enter applicable amount from table above | 1. | 110,000 | ||||
2. | Enter your modified AGI (that of both spouses, if married filing jointly) | 2. | 93,555 | ||||
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 . |
|||||||
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 $5,000 ($6,000 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less | 3. | 16,445 | ||||
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. | ||||||
|
4. | 4,120 | |||||
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 2011, but do not enter more than $5,000 ($6,000 if you are age 50 or older). If contributions are more than $5,000 ($6,000 if you are age 50 or older), see Excess Contributions , later. | 6. | 5,000 | ||||
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. | 4,120 | ||||
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. | 880 |
(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.)
|
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 | $56,000 | $66,000 | ||||
married filing jointly or qualifying widow(er) | $90,000 | $110,000 | |||||
married filing separately | $0 | $10,000 | |||||
are not covered by an employer plan, but your spouse is covered | married filing jointly | $169,000 | $179,000 | ||||
married filing separately | $0 | $10,000 | |||||
1. | Enter applicable amount from table above | 1. | 179,000 | ||||
2. | Enter your modified AGI (that of both spouses, if married filing jointly) | 2. | 171,555 | ||||
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 . |
|||||||
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 $5,000 ($6,000 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. | ||||||
|
4. | 3,730 | |||||
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. | 40,000 | ||||
6. | Enter contributions made, or to be made, to your IRA for 2011, but do not enter more than $5,000 ($6,000 if you are age 50 or older). If contributions are more than $5,000 ($6,000 if you are age 50 or older), see Excess Contributions , later. | 6. | 5,000 | ||||
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. | 3,730 | ||||
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. | 1,270 |
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.
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.
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.
-
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).
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. |
-
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).
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, 2011, 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, 2011, 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 waiver, and Extension of rollover period, later.
Example.
You received a distribution in late December 2011 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 2011 even though the 60-day limit was not up until 2012.
-
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.
-
Whether errors were made by the financial institution (other than those described under Automatic waiver , earlier),
-
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.
-
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.
-
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.
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.
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.
-
It is made from a failed financial institution by the Federal Deposit Insurance Corporation (FDIC) as receiver for the institution.
-
It was not initiated by either the custodial institution or the depositor.
-
It was made because:
-
The custodial institution is insolvent, and
-
The receiver is unable to find a buyer for the institution.
-
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.
-
A required minimum distribution (explained later under When Must You Withdraw Assets? (Required Minimum Distributions) ).
-
A hardship distribution.
-
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
-
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.
-
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.
-
Dividends on employer securities.
-
The cost of life insurance coverage.
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.
-
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.
-
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.
-
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.
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 . |
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.
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.
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.
-
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.
If you are a qualified taxpayer and you received qualified settlement income, 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.
-
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.
-
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).
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.
-
Changing the name on the IRA, and
-
Making a direct transfer of IRA assets.
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.
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.
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 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.
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.
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 2011 that are recharacterized, use Worksheet 1-3. See Regulations section 1.408A-5 for more information.
1. | Enter the amount of your IRA contribution for 2012 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, 2012, 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, 2013, 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) ($160,000 x (($225,000 – $240,000) ÷ $240,000)). Therefore, in order to recharacterize the April 1, 2012, $160,000 conversion contribution on April 1, 2013, 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 the following worksheet.
1. | Enter the amount of your IRA contribution for 2012 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 |
-
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 17, 2012, this period ends on October 15, 2012. 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.
-
Notifying the trustee(s) of your intent to recharacterize,
-
Providing the trustee with all necessary information, and
-
Having the trustee transfer the contribution.
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, 2011, 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 2012, to make the necessary adjustment to remove the conversion, Christine opened a traditional IRA with the same trustee. Also in January 2012, 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, Lyle and Christine have no taxable income from the conversion to report for 2011, and the resulting rollover to a traditional IRA is not treated as a rollover for purposes of the one-rollover-per-year rule.
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.
If you made IRA contributions in 2011, 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 2011 tax return without withdrawing a contribution that you made in 2011, you can still have the contribution returned to you within 6 months of the due date of your 2011 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 2011 that are returned to you, use Worksheet 1-4. See Regulations section 1.408-11 for more information.
1. | Enter the amount of your IRA contribution for 2012 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, 2012, 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, 2012, contribution be returned to her. On February 2, 2013, 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 2012 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, 2012, contribution is $75 ($400 x ($7,600 – $6,400) ÷ $6,400). Therefore, the total to be distributed on February 2, 2013, is $475. This is shown on the following worksheet.
1. | Enter the amount of your IRA contribution for 2012 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 |
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.
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.
If any part of these contributions is an excess contribution for 2010, it is subject to a 6% excise tax. You will not have to pay the 6% tax if any 2010 excess contribution was withdrawn by April 18, 2011 (plus extensions), and if any 2011 excess contribution is withdrawn by April 17, 2012 (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.
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.
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.
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.
If you do not receive your required minimum distribution for 2011 until 2012, both your 2011 and your 2012 distributions will be included in income on your 2012 return.
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.
Example 1.
Laura was born on October 1, 1940. She reaches age 70½ in 2011. Her required beginning date is April 1, 2012. As of December 31, 2010, 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 2011 is $1,000 ($26,500 ÷ 26.5). That amount is distributed to her on April 1, 2012.
Example 2.
Joe, born October 1, 1940, reached 70½ in 2011. His wife (his beneficiary) turned 56 in September 2011. He must begin receiving distributions by April 1, 2012. Joe's IRA account balance as of December 31, 2010, 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, 2011), the joint life expectancy for Joe (age 71) and his wife (age 56) is 30.1 years. The required minimum distribution for 2011, Joe's first distribution year, is $1,000 ($30,100 ÷ 30.1). This amount is distributed to Joe on April 1, 2012.
Example.
You own a traditional IRA. Your account balance at the end of 2011 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 2012. You use Table III. Your distribution period is 22.9. Your required minimum distribution for 2012 would be $4,367 ($100,000 ÷ 22.9).
Example.
You own a traditional IRA. Your account balance at the end of 2011 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 2012 and your spouse turns 64. You use Table II. Your joint life and last survivor expectancy is 23.6. Your required minimum distribution for 2012 would be $4,237 ($100,000 ÷ 23.6).
The rules for determining required minimum distributions for beneficiaries depend on whether the beneficiary is an individual. The rules for individuals are explained below. If the owner's beneficiary is not an individual (for example, if the beneficiary is the owner's estate), see Beneficiary not an individual , later.
If the owner died on or after his or her required beginning date, and you are the designated beneficiary, you generally must base required minimum distributions for years after the year of the owner's death on the longer of:
-
Your single life expectancy as shown on Table I, or
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The owner's life expectancy as determined under Death on or after required beginning date, under Beneficiary not an individual , later.
If the owner died before his or her required beginning date, base required minimum distributions for years after the year of the owner's death generally on your single life expectancy.
If the owner's beneficiary is not an individual (for example, if the beneficiary is the owner's estate), see Beneficiary not an individual , later.
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.
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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 2012). 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.
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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, reduced by one for each year since the year following the owner's death.
If the designated beneficiary dies after September 30 of the year following the year of the owner's death, 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 2011. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2012. You use Table I and see that your life expectancy in 2012 is 31.4. If the IRA was worth $100,000 at the end of 2011, your required minimum distribution for 2012 would be $3,185 ($100,000 ÷ 31.4). If the value of the IRA at the end of 2012 was again $100,000, your required minimum distribution for 2013 would be $3,289 ($100,000 ÷ 30.4). Instead of taking yearly distributions, you could choose to take the entire distribution in 2016 or earlier.
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Death on or after required beginning date. Divide the account balance at the end of 2011 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, reduced by one for each year after the year of death.
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Death before required beginning date. 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.
Example.
The owner died in 2011 at the age of 80. The owner's traditional IRA went to his estate. The account balance at the end of 2011 was $100,000. In 2012, 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 2011 at the age of 70, the entire account would have to be distributed by the end of 2016.
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.
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You are an individual and a designated beneficiary, but not both the owner's surviving spouse and sole designated beneficiary.
-
You are not an individual and the owner died on or after the required beginning date.
The age or ages to use with each table are explained below.
Example.
You are the owner's designated beneficiary figuring your first required minimum distribution. Distributions must begin in 2012. You become 57 years old in 2012. You use Table I. Your distribution period for 2013 is 26.9 (27.9 − 1) years. Your distribution period for 2014 is 25.9 (27.9 − 2).
Example.
You are the owner's surviving spouse and the sole designated beneficiary. The owner would have turned age 70½ in 2012. Distributions begin in 2012. You become 69 years old in 2012. You use Table 1. Your distribution period for 2012 is 17.8. For 2013, when you are 70 years old, your distribution period is 17.0. For 2014, when you are 71 years old, your distribution period is 16.3.
The following rules may apply to you.
Example.
Sara, born August 1, 1940, became 70½ on February 1, 2011. She has two traditional IRAs. She must begin receiving her IRA distributions by April 1, 2012. On December 31, 2010, 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 2011, is the beneficiary of IRA A. Her husband, age 78 as of his birthday in 2011, 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, 2012, is $1,132 ($377 + $755).
Example.
Justin became 70½ on December 15, 2011. Justin's IRA account balance on December 31, 2010, was $38,400. He figured his required minimum distribution for 2011 was $1,401 ($38,400 ÷ 27.4). By December 31, 2011, 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 2012, but his IRA account balance is reduced by the full $3,600 to figure his required minimum distribution for 2012. Justin's reduced IRA account balance on December 31, 2011, was $34,800. Justin figured his required minimum distribution for 2012 is $1,313 ($34,800 ÷ 26.5). During 2012, he must receive distributions of at least that amount.
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All of the beneficiaries are individuals, and
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The account or benefit has not been divided into separate accounts or shares for each beneficiary.
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The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
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The trust is irrevocable or will, by its terms, become irrevocable upon the death of the owner.
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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.
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The IRA trustee, custodian, or issuer has been provided with either a copy of the trust instrument with the agreement that if the trust instrument is amended, the administrator will be provided with a copy of the amendment within a reasonable time, or all of the following.
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A list of all of the beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the conditions on their entitlement).
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Certification that, to the best of the owner's knowledge, the list is correct and complete and that the requirements of (1), (2), and (3), earlier, are met.
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An agreement that, if the trust instrument is amended at any time in the future, the owner will, within a reasonable time, provide to the IRA trustee, custodian, or issuer corrected certifications to the extent that the amendment changes any information previously certified.
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An agreement to provide a copy of the trust instrument to the IRA trustee, custodian, or issuer upon demand.
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In general, distributions from a traditional IRA are taxable in the year you receive them.
-
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 .
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.
Example.
On November 1, 2011, 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 of $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 2011. 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 his 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 a charitable contribution deduction for the $20,000 portion of the distribution that was not included in his income.
You cannot claim a charitable contribution deduction for any QCD not included in your income.
Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.
If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2011, you must use Form 8606 to figure how much of your 2011 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.
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Use Worksheet 1-2 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.
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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.
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Complete lines 2 through 5 of Form 8606.
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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.
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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.
-
Enter the amount from line 8 of Worksheet 1-5 on lines 13 and 17 of Form 8606.
-
Complete line 14 of Form 8606.
-
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.
|
1. | Enter the basis in your traditional IRAs as of December 31, 2010 | 1. | |
2. | Enter the total of all contributions made to your traditional IRAs during 2011 and all contributions made during 2012 that were for 2011, 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, 2011 (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 2011. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2011. 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, 2011. (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, 2011, 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 |
2004 | 2,000 | -0- |
2005 | 2,000 | -0- |
2006 | 2,000 | -0- |
2007 | 1,000 | -0- |
2008 | 1,000 | -0- |
2009 | 1,000 | -0- |
2010 | 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 2011 will be reduced or eliminated. In 2011, 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, 2011, and did not recharacterize any contributions. At the end of 2011, 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 2011 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.
Use only if you made contributions to a traditional IRA for 2011 that may not be fully deductible and have to figure the taxable part of your 2011 distributions to determine your modified AGI. See Limit if Covered by Employer Plan .
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, 2011, 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, 2010 | 1. | 300 |
2. | Enter the total of all contributions made to your traditional IRAs during 2011 and all contributions made during 2012 that were for 2011, 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, 2011 (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 2011. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2011. 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, 2011. (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, 2011, 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. |
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 2010 of $2,000. By the end of 2011, 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 2012, 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 2012 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).
Two other special IRA distribution situations are discussed next.
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.
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/ |
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.
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 2011 |
P—Excess contributions plus earnings/ |
Q—Qualified distribution from a Roth IRA. |
R—Recharacterized IRA contribution made for 2010 |
S—Early distribution from a SIMPLE IRA in the first |
T—Roth IRA distribution, exception applies. |
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.
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.
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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 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.
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 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.
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Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets.
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Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so.
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Has any discretionary authority or discretionary responsibility in administering your IRA.
The following two types of transactions are not prohibited transactions if they meet the requirements that follow.
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Payments of cash, property, or other consideration by the sponsor of your traditional IRA to you (or members of your family).
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Your receipt of services at reduced or no cost from the bank where your traditional IRA is established or maintained.
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The payments are for establishing a traditional IRA or for making additional contributions to it.
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The IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries.
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During the year, the total fair market value of the payments you receive is not more than:
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$10 for IRA deposits of less than $5,000, or
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$20 for IRA deposits of $5,000 or more.
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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.
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The bank itself can legally offer the services.
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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).
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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.
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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.
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.
Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:
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$5,000 ($6,000 if you are age 50 or older), or
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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 Publication 560.
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 2011, Paul Jones is 45 years old and single, his compensation is $31,000, and he contributed $5,500 to his traditional IRA. Paul has made an excess contribution to his IRA of $500 ($5,500 minus the $5,000 limit). The contribution earned $5 interest in 2011 and $6 interest in 2012 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 2011 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.
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.
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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.
If you timely filed your 2011 tax return without withdrawing a contribution that you made in 2011, you can still have the contribution returned to you within 6 months of the due date of your 2011 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).
Example.
Maria, age 35, made an excess contribution in 2011 of $1,000, which she withdrew by April 17, 2012, 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 2011 (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 2011.
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.
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Total contributions (other than rollover contributions) for 2011 to your IRA were not more than $5,000 ($6,000 if you are age 50 or older).
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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.
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.
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Your maximum IRA deduction for this year minus any amounts contributed to your traditional IRAs for this year.
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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.
Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year.
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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 2010 and $1,500 in 2011 (the amounts of her taxable compensation for these years). For 2010, she actually contributed $1,400 but could deduct only $1,000. In 2010, $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 2010 return. Because Teri did not withdraw the excess, she owes excise tax of $24 for 2010. To avoid the excise tax for 2011, she can correct the $400 excess amount from 2010 in 2011 if her actual contributions are only $1,100 for 2011 (the allowable deductible contribution of $1,500 minus the $400 excess from 2010 she wants to treat as a deductible contribution in 2011). Teri can deduct $1,500 in 2011 (the $1,100 actually contributed plus the $400 excess contribution from 2010). This is shown on the following worksheet.
Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year.
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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 |
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.
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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. |
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.
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.
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.
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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.
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 .
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The amount you paid for unreimbursed medical expenses during the year of the distribution, minus
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7.5% of your adjusted gross income (defined later) for the year of the distribution.
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You lost your job.
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You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
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You receive the distributions during either the year you received the unemployment compensation or the following year.
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You receive the distributions no later than 60 days after you have been reemployed.
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Payment for services, such as wages.
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A loan.
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A gift.
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An inheritance given to either the student or the individual making the withdrawal.
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A withdrawal from personal savings (including savings from a qualified tuition program).
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Tax-free distributions from a Coverdell education savings account.
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Tax-free part of scholarships and fellowships.
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Pell grants.
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Employer-provided educational assistance.
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Veterans' educational assistance.
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Any other tax-free payment (other than a gift or inheritance) received as educational assistance.
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It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
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It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following.
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Yourself.
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Your spouse.
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Your or your spouse's child.
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Your or your spouse's grandchild.
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Your or your spouse's parent or other ancestor.
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When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
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Costs of buying, building, or rebuilding a home.
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Any usual or reasonable settlement, financing, or other closing costs.
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You enter into a binding contract to buy the main home for which the distribution is being used, or
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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.
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You were ordered or called to active duty after September 11, 2001.
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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.
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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.
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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.
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.
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.
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, Form 1040EZ, or Form 1040NR-EZ.
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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 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.
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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.
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