Modified AGI
limit for traditional IRA
contributions increased. For
2004, if you are covered by a
retirement plan at work, your
deduction for contributions to a
traditional IRA is reduced
(phased out) if your modified
adjusted gross income (AGI) is:
More than $65,000
but less than $75,000
for a married couple
filing a joint return or
a qualifying widow(er),
More than $45,000
but less than $55,000
for a single individual
or head of household, or
Less than $10,000
for a married individual
filing a separate
return.
For all filing
statuses other than married
filing separately, the upper and
lower limits of the phaseout
range increased by $5,000. See
How
Much Can You Deduct?
under Traditional IRAs,
later.
New method
for figuring net income on
returned or recharacterized IRA
contributions. There is a
new method for figuring the net
income on IRA contributions made
after 2003 that are returned to
you or recharacterized. For more
information, see
How
Do You Recharacterize a
Contribution or
Contributions Returned Before
the Due Date in
chapter 1 of Publication 590.
What's New for 2005
Traditional
IRA contribution and deduction
limit. The contribution
limit to your traditional IRA
for 2005 will be increased to
the smaller of the following
amounts:
$4,000, or
Your taxable
compensation for the
year.
If you reach age
50 before 2006, the most that
can be contributed to your
traditional IRA for 2005 will be
the smaller of the following
amounts:
$4,500, or
Your taxable
compensation for the
year.
Roth IRA
contribution limit. If
contributions on your behalf are
made only to Roth IRAs, your
contribution limit for 2005 will
generally be the lesser of:
$4,000, or
Your taxable
compensation for the
year.
If you are 50 or
older in 2005 and contributions
on your behalf are made only to
Roth IRAs, your contribution
limit for 2005 will generally be
the lesser of:
$4,500, or
Your taxable
compensation for the
year.
However, if your
modified AGI is above a certain
amount, your contribution limit
may be reduced.
Modified AGI
limit for traditional IRA
contributions increased. For
2005, if you are covered by a
retirement plan at work, your
deduction for contributions to a
traditional IRA will be reduced
(phased out) if your modified
adjusted gross income (AGI) is:
More than $70,000
but less than $80,000
for a married couple
filing a joint return or
a qualifying widow(er),
More than $50,000
but less than $60,000
for a single individual
or head of household, or
Less than $10,000
for a married individual
filing a separate
return.
For all filing
statuses other than married
filing separately, the upper and
lower limits of the phaseout
range will increase by $5,000.
Reminders
Statement of
required minimum distribution. If
a minimum distribution is
required from your IRA, the
trustee, custodian, or issuer
that held the IRA at the end of
the preceding year must either
report the amount of the
required minimum distribution to
you, or offer to calculate it
for you. The report or offer
must include the date by which
the amount must be distributed.
The report is due January 31 of
the year in which the minimum
distribution is required. It can
be provided with the year-end
fair market value statement that
you normally get each year. No
report is required for IRAs of
owners who have died.
IRA
interest. Although
interest earned from your IRA is
generally not taxed in the year
earned, it is not tax-exempt
interest. Do not report this
interest on your tax return as
tax-exempt interest.
Form 8606. If you make nondeductible
contributions to a traditional
IRA and you do not file Form
8606, Nondeductible IRAs, with
your tax return, you may have to
pay a $50 penalty.
Roth IRA. You
cannot claim a deduction for any
contributions to a Roth IRA.
But, if you satisfy the
requirements, all earnings are
tax free and neither your
nondeductible contributions nor
any earnings on them are taxable
when you withdraw them. See
Roth
IRAs, later.
Introduction
An individual retirement
arrangement (IRA) is a personal
savings plan that gives you tax
advantages for setting aside
money for your retirement.
This chapter discusses:
The rules for a
traditional IRA (any IRA
that is not a Roth or
SIMPLE IRA), and
The Roth IRA, which
features nondeductible
contributions and
tax-free distributions.
Simplified Employee Pensions
(SEPs) and Savings Incentive
Match Plans for Employees
(SIMPLEs) are not discussed in
this chapter. For more
information on these plans and
employees' SEP-IRAs and SIMPLE
IRAs that are part of these
plans, see Publications 560 and
590.
Useful Items - You
may want to see:
Publication
560
Retirement Plans for
Small Business
590
Individual Retirement
Arrangements (IRAs)
Form
(and Instructions)
5329
Additional Taxes on
Qualified Plans
(including IRAs) and
Other Tax-Favored
Accounts
8606
Nondeductible IRAs
Traditional IRAs
In this chapter the original
IRA (sometimes called an
ordinary or regular IRA) is
referred to as a “traditional
IRA.” Two advantages of a
traditional IRA are:
You may be able to
deduct some or all of
your contributions to
it, depending on your
circumstances, and,
Generally, amounts
in your IRA, including
earnings and gains, are
not taxed until they are
distributed.
What Is a
Traditional IRA?
A traditional IRA is any
IRA that is not a Roth IRA
or a SIMPLE IRA.
Who Can Set
Up a Traditional
IRA?
You can set up 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.
What is
compensation?
Generally,
compensation is what you
earn from working.
Compensation includes
wages, salaries, tips,
professional fees,
bonuses, and other
amounts you receive for
providing personal
services. The IRS treats
as compensation any
amount properly shown in
box 1 (Wages, tips,
other compensation) of
Form W-2, Wage and Tax
Statement, provided that
amount is reduced by any
amount properly shown in
box 11 (Nonqualified
plans).
Scholarship and
fellowship payments are
compensation for this
purpose only if shown in
box 1 of Form W-2.
Compensation also
includes commissions and
taxable alimony and
separate maintenance
payments.
Self-employment income.
If you are
self-employed (a sole
proprietor or a
partner), compensation
is the net earnings from
your trade or business
(provided your personal
services are a material
income-producing factor)
reduced by the total of:
The
deduction for
contributions
made on your
behalf to
retirement
plans, and
The
deduction
allowed for
one-half of your
self-employment
taxes.
Compensation includes
earnings from
self-employment even if
they are not subject to
self-employment tax
because of your
religious beliefs. See
Publication 533,
Self-Employment Tax, for
more information.
What is
not compensation?
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.
Any amounts
you exclude from
income, such as
foreign earned
income and
housing costs.
When and How
Can a
Traditional IRA
Be Set Up?
You can set up a
traditional IRA at any time.
However, the time for making
contributions for any year
is limited. See
When Can Contributions Be
Made, later.
You can set up different
kinds of IRAs with a variety
of organizations. You can
set up an IRA at a bank or
other financial institution
or with a mutual fund or
life insurance company. You
can also set up an IRA
through your stockbroker.
Any IRA must meet Internal
Revenue Code requirements.
Kinds
of traditional IRAs.
Your traditional IRA
can be an individual
retirement account or
annuity. It can be part
of either a simplified
employee pension (SEP)
or an employer or
employee association
trust account.
How Much Can
Be Contributed?
There are limits and
other rules that affect the
amount that can be
contributed and the amount
you can deduct. These limits
and other rules are
explained below.
Community property laws.
Except as discussed
later under
Spousal IRA limit,
each spouse figures his
or her limit separately,
using his or her own
compensation. This is
the rule even in states
with community property
laws.
Brokers' commissions.
Brokers' commissions
paid in connection with
your traditional IRA are
subject to the
contribution limit.
Trustees' fees.
Trustees'
administrative fees are
not subject to the
contribution limit.
Contributions to your
traditional IRAs reduce your
limit for contributions to
Roth IRAs. (See Roth IRAs,
later.)
General
limit.
The most that can be
contributed to your
traditional IRA is the
smaller of the following
amounts.
$3,000
($3,500 if you
are 50 or older
in 2004). For
2005, this
amount increases
to $4,000
($4,500 if 50 or
older in 2005).
Your taxable
compensation
(defined
earlier) for the
year.
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.)
Example 1.
Betty, who is 34
years old and single,
earned $24,000 in 2004.
Her IRA contributions
for 2004 are limited to
$3,000.
Example 2.
John, an unmarried
college student working
part time, earned $1,500
in 2004. His IRA
contributions for 2004
are limited to $1,500,
the amount of his
compensation.
Spousal
IRA limit.
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 amounts.
$3,000
($3,500 if you
are 50 or older
in 2004). For
2005, this
amount increases
to $4,000
($4,500 if 50 or
older in 2005).
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
contribution
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 $6,000 ($6,500
if only one of you is 50
or older, or $7,000 if
both of you are 50 or
older). For 2005,
combined total
contributions can be as
much as $8, 000 ($8,500
if only one of you is 50
or older or $9,000 if
both of you are 50 or
older.
When Can
Contributions Be
Made?
As soon as you set up
your traditional IRA,
contributions can be made to
it through your chosen
sponsor (trustee or other
administrator).
Contributions to a
traditional IRA must be in
the form of money (cash,
check, or money order).
Property cannot be
contributed.
Contributions must be
made by due date.
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. For most
people, this means that
contributions for 2004
must be made by April
15, 2005, and
contributions for 2005
must be made by April
17, 2006.
Age 70½
rule.
Contributions cannot
be made to your
traditional IRA for the
year in which you reach
age 70½ or for any later
year.
You attain age 70½ on
the date that is six
calendar months after
the 70th anniversary of
your birth. If you were
born on June 30, 1934,
the 70th anniversary of
your birth is June 30,
2004, and you attained
age 70½ on December 30,
2004. If you were born
on July 1, 1934, the
70th anniversary of your
birth was July 1, 2004,
and you attained age 70½
on January 1, 2005.
Designating year for
which contribution is
made.
If an amount is
contributed to your
traditional IRA between
January 1 and April 15,
you should tell the
sponsor which year (the
current year or the
previous year) the
contribution is for. If
you do not tell the
sponsor which year it is
for, the sponsor can
assume, and report to
the IRS, that the
contribution is for the
current year (the year
the sponsor received
it).
Filing
before a contribution is
made.
You can file your
return claiming a
traditional IRA
contribution before the
contribution is actually
made. However, the
contribution must be
made by the due date of
your return, not
including extensions.
Contributions not
required.
You do not have to
contribute to your
traditional IRA for
every tax year, even if
you can.
How Much Can
You Deduct?
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 it applies).
However, if you or your
spouse was covered by an
employer retirement plan,
you may not be able to
deduct this amount. See
Limit If Covered by Employer
Plan, later.
You may be eligible
to claim a credit for
contributions to your
traditional IRA. For more
information see chapter 39.
Trustees' fees.
Trustees'
administrative fees that
are billed separately
and paid in connection
with your traditional
IRA are not deductible
as IRA contributions.
However, they may be
deductible as a
miscellaneous itemized
deduction on Schedule A
(Form 1040). See chapter
30.
Brokers' commissions.
Brokers' commissions
are part of your IRA
contribution and, as
such, are deductible
subject to the limits.
Full
deduction. If
neither you nor your
spouse was covered for
any part of the year by
an employer retirement
plan, you can take a
deduction for total
contributions to one or
more traditional IRAs of
up to the lesser of the
following amounts.
$3,000
($3,500 if you
are 50 or older
in 2004). For
2005, this
amount increases
to $4,000
($4,500 if you
are 50 or older
in 2005).
100% of your
compensation.
This limit is reduced by
any contributions made
to a 501(c)(18) plan on
your behalf.
Spousal IRA.
In the case of a
married couple with
unequal compensation who
file a joint return, the
deduction for
contributions to the
traditional IRA of the
spouse with less
compensation is limited
to the lesser of the
following amounts.
$3,000
($3,500 if you
are 50 or older
in 2004). For
2005, this
amount increases
to $4,000
($4,500 if you
are 50 or older
in 2005).
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.
This limit is reduced by
any contributions to a
501(c)(18) plan on
behalf of the spouse
with less compensation.
Note.
If you were
divorced or legally
separated (and did
not remarry) before
the end of the year,
you cannot deduct
any contributions to
your spouse's IRA.
After a divorce or
legal separation,
you can deduct only
contributions to
your own IRA. Your
deductions are
subject to the rules
for single
individuals.
Covered
by an employer
retirement plan.
If you or your spouse
was covered by an
employer retirement plan
at any time during the
year for which
contributions were made,
your deduction may be
further limited. This is
discussed later under
Limit If Covered by
Employer Plan.
Limits on the amount you
can deduct do not affect
the amount that can be
contributed. See
Nondeductible
Contributions,
later.
Are You
Covered by
an Employer
Plan?
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.
Federal judges.
For purposes of
the IRA deduction,
federal judges are
covered by an
employer retirement
plan.
For Which
Year(s) Are
You Covered?
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.
Tax
year. Your tax
year is the annual
accounting period
you use to keep
records and report
income and expenses
on your income tax
return. For almost
all people, the tax
year is the calendar
year.
Defined contribution
plan.
Generally, you are
covered by a defined
contribution plan
for a tax year if
amounts are
contributed or
allocated to your
account for the plan
year that ends with
or within that tax
year.
A defined
contribution plan is
a plan that provides
for a separate
account for each
person covered by
the plan. Types of
defined contribution
plans include
profit-sharing
plans, stock bonus
plans, and money
purchase pension
plans.
Defined benefit
plan. If you
are eligible to
participate in your
employer's defined
benefit plan for the
plan year that ends
within your tax
year, you are
covered by the plan.
This rule applies
even if you:
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.
A defined benefit
plan is any plan
that is not a
defined contribution
plan. Defined
benefit plans
include pension
plans and annuity
plans.
No
vested interest.
If you accrue a
benefit for a plan
year, you are
covered by that plan
even if you have no
vested interest in
(legal right to) the
account or the
accrual.
Situations
in Which You
Are Not
Covered
Unless you are
covered under another
employer plan, you are
not covered by an
employer plan if you are
in one of the situations
described below.
Social security or
railroad retirement.
Coverage under
social security or
railroad retirement
is not coverage
under an employer
retirement plan.
Benefits from a
previous employer's
plan.
If you receive
retirement benefits
from a previous
employer's plan, you
are not covered by
that plan.
Reservists.
If the only reason
you participate in a
plan is because you
are a member of a
reserve unit of the
armed forces, you
may not be covered
by the plan. You are
not covered by the
plan if both of the
following conditions
are met.
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).
Volunteer
firefighters.
If the only reason
you participate in a
plan is because you
are a volunteer
firefighter, you may
not be covered by
the plan. You are
not covered by the
plan if both of the
following conditions
are met.
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.
Limit If
Covered by
Employer
Plan
If either you or your
spouse was covered by an
employer retirement
plan, you may be
entitled to only a
partial (reduced)
deduction or no
deduction at all,
depending on your income
and your filing status.
Your deduction begins
to decrease (phase out)
when your income rises
above a certain amount
and is eliminated
altogether when it
reaches a higher amount.
These amounts vary
depending on your filing
status.
To determine if your
deduction is subject to
phaseout, you must
determine your modified
adjusted gross income
(AGI) and your filing
status. See
Filing status
and
Modified adjusted
gross income (AGI),
later. Then use Table
18-1 or 18-2 to
determine if the
phaseout applies.
Social security
recipients.
Instead of using
Table 18-1 or 18-2,
use the worksheets
in Appendix B of
Publication 590 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 those worksheets
to figure your IRA
deduction, your
nondeductible
contribution, and
the taxable portion,
if any, of your
social security
benefits.
Deduction phaseout.
If you were
covered by an
employer retirement
plan and you did not
receive any social
security retirement
benefits, your IRA
deduction may be
reduced or
eliminated depending
on your filing
status and modified
AGI as shown in
Table 18-1.
Table
18-1. Effect
of Modified
AGI 1
on Deduction
if You Are
Covered by
Retirement
Plan at Work
If
you
are
covered
by a
retirement
plan
at
work,
use
this
table
to
determine
if
your
modified
AGI
affects
the
amount
of
your
deduction.
IF your filing status is...
AND your modified AGI is...
THEN you can take...
single
or
head
of
household
$45,000
or
less
a
full
deduction.
more
than
$45,000
but
less
than
$55,000
a
partial
deduction.
$55,000
or
more
no
deduction.
married
filing
jointly
or
qualifying
widow(er)
$65,000
or
less
a
full
deduction.
more
than
$65,000
but
less
than
$75,000
a
partial
deduction.
$75,000
or
more
no
deduction.
married
filing
separately
2
less
than
$10,000
a
partial
deduction.
$10,000
or
more
no
deduction.
1Modified
AGI
(adjusted
gross
income).
See
Modified
adjusted
gross
income
(AGI).
2If
you
did
not
live
with
your
spouse
at
any
time
during
the
year,
your
filing
status
is
considered
Single
for
this
purpose
(therefore,
your
IRA
deduction
is
determined
under
the
“Single”
column).
For 2005, 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 $50,000
but less
than $60,000
for a single
individual
(or head of
household),
More
than $70,000
but less
than $80,000
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.
For all filing
statuses other than
married filing
separately, the
upper and lower
limits of the
phaseout range for
2005 will increase
by $5,000 from the
limits for 2004.
If your spouse
is covered.
If you are not
covered by an
employer retirement
plan, but your
spouse is, and you
did not receive any
social security
benefits, your IRA
deduction may be
reduced or
eliminated entirely
depending on your
filing status and
modified AGI as
shown in Table 18-2.
Table
18-2. Effect
of Modified
AGI 1
on Deduction
if You Are
NOT Covered
by
Retirement
Plan at Work
If
you
are
not
covered
by a
retirement
plan
at
work,
use
this
table
to
determine
if
your
modified
AGI
affects
the
amount
of
your
deduction.
IF your filing status is...
AND your modified AGI is...
THEN you can take...
single,
head
of
household,
or
qualifying
widow(er)
any
amount
a
full
deduction.
married
filing
jointly
or
separately
with
a
spouse
who
is
not
covered
by a
plan
at
work
any
amount
a
full
deduction.
married
filing
jointly
with
a
spouse
who
is
covered
by a
plan
at
work
$150,000
or
less
a
full
deduction.
more
than
$150,000
but
less
than
$160,000
a
partial
deduction.
$160,000
or
more
no
deduction.
married
filing
separately
with
a
spouse
who
is
covered
by a
plan
at
work
2
less
than
$10,000
a
partial
deduction.
$10,000
or
more
no
deduction.
1Modified
AGI
(adjusted
gross
income).
See
Modified
adjusted
gross
income
(AGI).
2You
are
entitled
to
the
full
deduction
if
you
did
not
live
with
your
spouse
at
any
time
during
the
year.
Filing status.
Your filing status
depends primarily on
your marital status.
For this purpose,
you need to know if
your filing status
is single or head of
household, married
filing jointly or
qualifying
widow(er), or
married filing
separately. If you
need more
information on
filing status, see
chapter 2.
Lived apart from
spouse.
If you did not
live with your
spouse at any time
during the year and
you file a separate
return, your filing
status, for this
purpose, is single.
Modified adjusted
gross income (AGI).
How you figure
your modified AGI
depends on whether
you are filing Form
1040 or Form 1040A.
If you made
contributions to
your IRA for 2004
and received a
distribution from
your IRA in 2004,
see Publication 590.
Do not assume
that your modified
AGI is the same as
your compensation.
Your modified AGI
may include income
in addition to your
compensation
(discussed earlier),
such as interest,
dividends, and
income from IRA
distributions.
Form 1040.
If you file Form
1040, refigure the
amount on page 1 “adjusted
gross income”
line without taking
into account any of
the following
amounts.
IRA
deduction.
Student
loan
interest
deduction.
Tuition
and fees
deduction.
Foreign
earned
income
exclusion.
Foreign
housing
exclusion or
deduction.
Exclusion of
qualified
savings bond
interest
shown on
Form 8815,
Exclusion of
Interest
From Series
EE and I
U.S. Savings
Bonds Issued
After 1989
(For Filers
With
Qualified
Higher
Education
Expenses).
Exclusion of
employer-provided
adoption
benefits
shown on
Form 8839,
Qualified
Adoption
Expenses.
This is your
modified AGI.
Form 1040A.
If you file Form
1040A, refigure the
amount on page 1 “adjusted
gross income”
line without taking
into account any of
the following
amounts.
IRA
deduction.
Student
loan
interest
deduction.
Tuition
and fees
deduction.
Exclusion of
qualified
savings bond
interest
shown on
Form 8815.
Exclusion of
employer-provided
adoption
benefits
shown on
Form 8839.
This is your
modified AGI.
Both
contributions for
2004 and
distributions in
2004. If
all three of the
following apply, any
IRA distributions
you received in 2004
may be partly tax
free and partly
taxable.
You
received
distributions
in 2004 from
one or more
traditional
IRAs.
You made
contributions
to a
traditional
IRA for
2004.
Some of
those
contributions
may be
nondeductible
contributions
depending on
whether your
IRA
deduction
for 2004 is
reduced.
If this is your
situation, you must
figure the taxable
part of the
traditional IRA
distribution before
you can figure your
modified AGI. To do
this, you can use
Worksheet 1-5,
Figuring the Taxable
Part of Your IRA
Distribution, in
Publication 590.
If at least one of
the above does not
apply, figure your
modified AGI using
Worksheet 18-1 in
this chapter.
How
to figure your
reduced IRA
deduction. You
can figure your
reduced IRA
deduction for either
Form 1040 or Form
1040A by using the
worksheets in
chapter 1 of
Publication 590.
Also, the
instructions for
Form 1040 and Form
1040A include
similar worksheets
that you may be able
to use instead.
Reporting
Deductible
Contributions
If you file Form
1040, enter your IRA
deduction on line 25 of
that form. If you file
Form 1040A, enter your
IRA deduction on line
17. You cannot deduct
IRA contributions on
Form 1040EZ.
Worksheet
18-1. Figuring
Your Modified
AGI
Use
this
worksheet
to
figure
your
modified
adjusted
gross
income
for
traditional
IRA
purposes.
1.
Enter
your
adjusted
gross
income
(AGI)
shown on
line 22,
Form
1040A,
or line
37, Form
1040
figured
without
taking
into
account
line 17,
Form
1040A,
or line
25, Form
1040
1.
2.
Enter
any
Student
loan
interest
deduction
from
line 18,
Form
1040A,
or line
26, Form
1040
2.
3.
Enter
any
Tuition
and fees
deduction
from
line 19,
Form
1040A,
or line
27, Form
1040
3.
4.
Enter
any
Foreign
earned
income
and/or
housing
exclusion
from
line 18,
Form
2555-EZ,
or line
43, Form
2555
4.
5.
Enter
any
Foreign
housing
deduction
from
line 48,
Form
2555
5.
6.
Enter
any
Excluded
qualified
savings
bond
interest
shown on
line 3,
Schedule
1, Form
1040A,
or line
3,
Schedule
B,
Form
1040
(from
line 14,
Form
8815)
6.
7.
Enter
any
Exclusion
of
employer-provided
adoption
benefits
shown
on line
30, Form
8839
7.
8.
Add
lines 1
through
7. This
is your
Modified
AGI
for
traditional
IRA
purposes
8.
Nondeductible
Contributions
Although your deduction
for IRA contributions may be
reduced or eliminated,
contributions can be made to
your IRA up to the general
limit or, if it applies, the
spousal IRA limit. The
difference between your
total permitted
contributions and your IRA
deduction, if any, is your
nondeductible contribution.
Example.
Mike is 28 years old
and single. In 2004, he
was covered by a
retirement plan at work.
His salary was $52,312.
His modified AGI was
$60,000. Mike made a
$3,000 IRA contribution
for 2004. Because he was
covered by a retirement
plan and his modified
AGI was over $55,000, he
cannot deduct his $3,000
IRA contribution. He
must designate this
contribution as a
nondeductible
contribution by
reporting it on Form
8606, as explained next.
Form
8606.
To designate
contributions as
nondeductible, you must
file Form 8606.
You do not have to
designate a contribution
as nondeductible until
you file your tax
return. When you file,
you can even designate
otherwise deductible
contributions as
nondeductible.
You must file Form
8606 to report
nondeductible
contributions even if
you do not have to file
a tax return for the
year.
Failure to report
nondeductible
contributions.
If you do not report
nondeductible
contributions, all of
the contributions to
your traditional IRA
will be treated as
deductible. All
distributions from your
IRA will be taxed unless
you can show, with
satisfactory evidence,
that nondeductible
contributions were made.
Penalty for
overstatement.
If you overstate the
amount of nondeductible
contributions on your
Form 8606 for any tax
year, you must pay a
penalty of $100 for each
overstatement, unless it
was due to reasonable
cause.
Penalty for failure to
file Form 8606.
You will have to pay a
$50 penalty if you do
not file a required Form
8606, unless you can
prove that the failure
was due to reasonable
cause.
Tax on
earnings on
nondeductible
contributions.
As long as
contributions are within
the contribution limits,
none of the earnings or
gains on contributions
(deductible or
nondeductible) will be
taxed until they are
distributed. See
When Can You
Withdraw or Use IRA
Assets,
later.
Cost
basis.
You will have a cost
basis in your
traditional IRA if you
made any nondeductible
contributions. Your cost
basis is the sum of the
nondeductible
contributions to your
IRA minus any
withdrawals or
distributions of
nondeductible
contributions.
Inherited
IRAs
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.
Inherited from spouse.
If you inherit a
traditional IRA from
your spouse, you
generally have the
following three choices.
Treat it as
your own by
designating
yourself as the
account owner.
Treat it as
your own by
rolling it over
into your
traditional 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),
or
Deferred
compensation
plan of
a state
or local
government
(section
457
plan).
Treat
yourself as the
beneficiary
rather than
treating the IRA
as your own.
Treating it as your own.
You will be considered
to have chosen to treat
the IRA as your own if:
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 will only be
considered to have
chosen to treat the IRA
as your own if:
You are the
sole beneficiary
of the IRA, and
You have an
unlimited right
to withdraw
amounts from it.
However, if you receive a
distribution from your
deceased spouse's IRA, you
can roll that distribution
over into your own IRA
within the 60-day time
limit, as long as the
distribution is not a
required distribution, even
if you are not the sole
beneficiary of your deceased
spouse's IRA.
Inherited from someone
other than spouse.
If you inherit a
traditional IRA from
anyone other than your
deceased spouse, you
cannot treat the
inherited IRA as your
own. This means that you
cannot make any
contributions to the
IRA. It also means you
cannot roll over any
amounts into or out of
the inherited IRA.
However, you can make a
trustee-to-trustee
transfer as long as the
IRA into which amounts
are being moved is set
up and maintained in the
name of the deceased IRA
owner for the benefit of
you as beneficiary.
For more information, see
the discussion of inherited
IRAs under
Rollover From One IRA Into
Another, later.
Can You Move
Retirement Plan
Assets?
You can transfer, tax
free, assets (money or
property) from other
retirement plans (including
traditional IRAs) to a
traditional IRA. You can
make the following kinds of
transfers.
Transfers from
one trustee to
another.
Rollovers.
Transfers
incident to a
divorce.
Transfers to Roth IRAs.
Under certain
conditions, you can move
assets from a
traditional IRA to a
Roth IRA. See
Can You Move Amounts
Into a Roth IRA
under
Roth IRAs,
later.
Trustee-to-Trustee
Transfer
A transfer of funds
in your traditional IRA
from one trustee
directly to another,
either at your request
or at the trustee's
request, is not a
rollover. Because there
is no distribution to
you, the transfer is tax
free. Because it is not
a rollover, it is not
affected by the 1-year
waiting period required
between rollovers,
discussed later under
Rollover From One
IRA Into Another.
For information about
direct transfers to IRAs
from retirement plans
other than IRAs, see
Publication 590.
Rollovers
Generally, a
rollover is a tax-free
distribution to you of
cash or other assets
from one retirement plan
that you contribute
(roll over) to another
retirement plan. The
contribution to the
second retirement plan
is called a “rollover
contribution.”
Note.
An amount rolled
over tax free from
one retirement plan
to another is
generally includible
in income when it is
distributed from the
second plan.
Kinds of rollovers
to a traditional
IRA. You can
roll over amounts
from the following
plans into a
traditional IRA:
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(b)
plan).
Treatment of
rollovers.
You cannot deduct
a rollover
contribution, but
you must report the
rollover
distribution on your
tax return as
discussed later
under
Reporting
rollovers from IRAs
and under
Reporting
rollovers from
employer plans.
Kinds of rollovers
from a traditional
IRA. You may
be able to roll
over, tax free, a
distribution from
your traditional IRA
into a qualified
plan. These plans
include the federal
Thrift Savings Fund
(for federal
employees), deferred
compensation plans
of state or local
governments (section
457 plans), and
tax-sheltered
annuity plans
(section 403(b)
plans). The part of
the distribution
that you can roll
over is the part
that would otherwise
be taxable
(includible in your
income). Qualified
plans may, but are
not required to,
accept such
rollovers.
Time limit for
making a rollover
contribution.
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.
The IRS may waive
the 60-day requirement
where the failure to do
so would be against
equity or good
conscience, such as in
the event of a casualty,
disaster, or other event
beyond your reasonable
control. For more
information, see
Publication 590.
Extension of
rollover period.
If an amount
distributed to you
from a traditional
IRA or a qualified
employer retirement
plan is a frozen
deposit at any time
during the 60-day
period allowed for a
rollover, special
rules extend the
rollover period. For
more information,
see Publication 590.
More information.
For more
information on
rollovers, see
Publication 590.
