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IRA - Individual Retirement Account

Back to Fall Tax Planning Guide Index * Back to Social Security Income * Self-Employed Health Insurance * Back to Education Loan InterestForm 1098-E Student Loan Interest Payments * Traditional IRA Deductibility Rules * IRA Excess Contribution Penalty * IRA Early Withdrawal Penalties * New for 1999 * Selecting The Age of Beneficiary * IRA-to-IRA Rollover Pitfalls and How to Avoid Them

An Individual Retirement Account (IRA) can be set up at any time at a bank or other financial institution, mutual fund companies or life insurance companies. All plans must meet Internal Revenue Code requirements. Contributions to an IRA must be in the form of money, not property. The annual contribution limitation to your IRA and a spousal IRA for a non-working spouse or a spouse with income less than $2,000 is the lessor of:

All contributions must be made by the due date of the return without extensions. IRA contributions are deemed timely if postmarked by the due date. (Use certified or registered mail for evidence of postmark.) (PLR 8551065)

Deductibility Rules

The deductibility of your IRA contributions can be limited if you or your spouse were covered by an employer retirement plan at any time during the year for which the contribution is made. If you are covered by a plan, the "Pension Plan" box on the W-2 should be marked. For self-employed and participants in a qualified retirement plan such as a SEP or Keogh, the IRA deductions could be limited.

If you are active in an employer's retirement plan, then your

IRA deduction is reduced or eliminated depending on your filing status and modified AGI.


Single or HOH MFJ
$30,000 - $40,000 $50,000 - $60,000

MFS: $0 - $10,000 and thereafter

$31,000 - $41,000 $51,000 - $61,000
$32,000 - $42,000 $52,000 - $62,000
$33,000 - $43,000 $53,000 - $63,000
$34,000 - $44,000 $54,000 - $64,000
$40,000 - $50,000 $60,000 - $70,000
$45,000 - $55,000 $65,000 - $75,000
$50,000 - $60,000 $70,000 - $80,000
and thereafter... $75,000 - $85,000
.... $80,000 - $100,000
.... and thereafter...

A non-working spouse will not be treated as an active participant in an employer's retirement plan due to the working spouse being an active participant. However, the IRA deduction of the spouse who is not an active participant will phase out when AGI is between $150,000 and $160,000. The non-working spouse can make a contribution based on the other spouse's earned income.

Excess Contribution Penalty

Excess contributions to your IRA will not be disqualified but there will be a 6% excise tax imposed. Excess IRA contributions by definition do not include non deductible contributions or rollover contributions. Example: A transfer from a qualified plan to an IRA, or IRA to an IRA that does not meet the rollover provisions or a contribution in excess of the normal $2,000 limit is an excess contribution and subject to the excise tax penalty. This 6% penalty applies to the year the excess contribution is made and each year thereafter that the money stays in the IRA account (4973(a)). The calculation is 6% of the lesser of the excess contribution or of the value of the IRA account at the close of the taxpayer's year.

    Taxpayers have the following options after the excess contribution is made:
  1. Transfer the excess contribution into future years.
  2. Withdraw excess by the due date of the return, including extensions.

Early Withdrawal Penalties

Generally, you must pay an additional tax of 10% of the taxable amount of any "early withdrawal" from your IRA before you reach age 59 . Prior to the 1996 Act, the only exceptions to this rule were withdrawals due to death or disability, and withdrawals taken in the form of a series of periodic payments. The 1996 and 1997 Act added three other penalty exceptions.

1. Distributions for payment of health insurance premiums of certain unemployed individuals after December 31, 1996 if:

Note: All three conditions must be met to qualify. A self-employed individual will qualify for penalty-free distributions under this provision if the individual would have received unemployment except for the fact that they had been self-employed.

2. Qualified college expenses such as tuition, fees, books, supplies, and equipment. Enrollment or attendance must be at a post-secondary educational institution for academic periods and the IRA distributions after December 31, 1998.

3. A first-time home purchase if the individual (and spouse, if married) has not owned a house for the prior two years. Amounts up to $10,000 may be withdrawn for this purpose and must be used within 120 days of the withdrawal.

New for 1999

Under prior law, there was no exception to the 10% early withdrawal penalty for withdrawals from an employer sponsored retirement plan or from an IRA that resulted from an IRS levy. The '98 Act exempts amounts withdrawn from an employer-sponsored retirement plan or an IRA that are subject to a levy by IRS from the 10% early withdrawal tax. ('98 Act 3436(a): Code Sec. 72(t)(2)(A)).

Selecting The Age of Beneficiary

One of the ways to maximize the growth of IRAs is to minimize distributions because all funds remaining on deposit accumulate tax deferred earnings. Naming a beneficiary younger than the owner can minimize the distribution required because the distributions are based on life expectancy tables. However, there is only a 10 year maximum age difference permitted in calculating the minimum distribution. If you name your child that is 25 years younger, for minimum distribution purposes the child is treated as having a life expectancy no more than 20 years greater than the parent.

Calculating annual minimum distributions = Minimum Distributions for 1999 = Value of IRA at January 1, 1999/IRS Life Expectancy Tables. For Life Expectancy Tables see IRS Pub. 590.

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