Tax Guide for IRAs (IRA)
INDIVIDUAL RETIREMENT ARRANGEMENT (IRA)
An IRA is a personal savings plan that offers you tax advantages for setting aside money for your retirement. There are two types of IRAs: traditional IRAs and Roth IRAs. Which IRA you choose for your own retirement plan will depend on the amount and type of income you have now and what you expect to receive when you retire.
Contributions to traditional IRAs may be fully or partially deductible or not deductible at all. This depends on your income level and whether you are covered by your employer’s retirement plan, such as a 401(k). Generally, amounts in your traditional IRA, including earnings and deductible contributions, are not taxed until they are distributed.
On the other hand, Roth IRA contributions are not deductible in the year contributed; however, qualified Roth IRA withdrawals, including the earnings, are not taxable in the year distributed.
The contribution limit to a traditional IRA and/or a Roth IRA is generally up to $5,000 for each taxpayer. Taxpayers age 50 or over can contribute up to $6,000. The maximum an individual can contribute to any type of IRA is $5,000 (or $6,000 if age 50 or over). Contributions to a Roth IRA will reduce the amount that can be contributed to a traditional IRA and vice versa. The amount contributed to any IRA must be equal to or less than the amount of earned income on the individual or joint return. Earned income includes wages, salaries, commissions, self-employment income, and, only for the purpose of IRAs, any alimony received.
TRADITIONAL IRAs
No contributions are allowed to a traditional IRA in and after the year you turn age 70½. At that age, there is a required minimum distribution (RMD) that must be withdrawn each year.
When you are already covered by an employer retirement plan, deductibility of your allowed contribution amount is phased out based on the filing status and AGI. At the higher amount, no deduction is allowed but nondeductible contributions can still be made. The AGI phase-out range for 2012 is:
• $92,000 - $112,000 for married persons filing jointly and qualifying widow(er)s
• $0 - $10,000 for married persons filing separately (if lived with spouse during the year)
• $58,000 - $68,000 for persons filing single and head of household
Special limits apply if you are not covered by an employer retirement plan but your spouse is. If you are not covered by an employer plan, your traditional IRA contribution is fully deductible.
ROTH IRAs
There is no deduction allowed on the tax return. Your contribution amount to a Roth IRA is limited when your adjusted gross income reaches $110,000 ($173,000 for MFJ or QW). Unlike a traditional IRA, contributions to a Roth IRA can be made after age 70 ½ and you are not required to take distributions at any age.
COMBAT PAY IS ELIGIBLE FOR IRA CONTRIBUTIONS
Nontaxable combat pay is compensation for IRA contribution purposes.
CONVERTING A TRADITIONAL IRA TO A ROTH IRA
For tax years after 2009, you can convert a traditional IRA to a Roth IRA regardless of your filing status and modified adjusted gross income. For 2010 you could choose to pay taxes on the distribution that you converted, except on any nondeductible contributions you may have made to the traditional IRA, or you could have chosen to include in income equal amounts in 2011 and 2012.
WITHDRAWALS FROM TRADITIONAL IRAS
Generally, if you are under age 59 ½, you must pay a 10% additional tax on money you withdraw from your traditional IRA. This tax is in addition to regular income tax you pay on the distribution amount that is included in your income.
Some exceptions to the 10% additional tax include: paying unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, receiving a decedent’s IRA as a beneficiary, using the distribution to buy, build or rebuild a first home (up to $10,000), paying qualified education expenses or due to total and permanent disability.
As the owner of a traditional IRA, you must start receiving distributions by April 1 of the year following the year you reach age 70 ½. If the required minimum distribution amount is not distributed, a 50% excise tax is charged on the excess accumulation.
WITHDRAWALS FROM ROTH IRAS
You are not required to take distributions from your Roth IRA at any age. Qualified distributions, including earnings, from your Roth IRA are not included in your income. A qualified distribution is one made after the Roth IRA has been established for 5 tax years and made on or after the date you reach age 59 ½, made because you are disabled, used to pay qualified first-time homebuyer expenses or other allowable exceptions. Early distributions from Roth IRAs are subject to 10% additional tax based on the taxable amount of the distribution.
RETIREMENT SAVINGS CONTRIBUTION CREDIT
You may be able to claim a tax credit for a percentage of your qualified retirement plan contributions, such as contributions to your traditional or Roth IRA. The credit percentage is determined by your adjusted gross income and filing status.
CLIENT CHECKLIST
What to bring to your Liberty Tax client interview:
PERSONAL INFORMATION FOR EACH
FAMILY MEMBER:
o Name
o Date of Birth
o Social Security Card
ALSO:
o Last Year’s Tax Return
o Valid Driver’s License
INCOME AND TAX INFORMATION:
o W-2’s
o Interest (1099-INT or substitute)
o Dividend (1099-DIV or substitute)
o Stock Sales (1099-B or Broker Statement)
o Self-Employment Income (1099-MISC or record of payments)
o Sale of a Personal Residence
o Rental Income
o Sale of any Business Assets
o Gambling or Lottery Winnings
o State Income Tax Refund
o Pension Income (1099-R, RRB-1099, CSA-1099)
o Any Estimated Taxes Paid
o Social Security or Railroad Retirement
o IRA or 401(k) Distribution (1099-R)
o Unemployment Compensation
DEDUCTIONS/ADJUSTMENTS:
o Medical Expenses
o Real Estate and/or Personal Property Taxes
o Mortgage Interest
o Charitable Contributions
o Employee Business Expenses
o Gambling Losses
o Moving Expenses
o Traditional IRA Contributions
o Certain Education Expenses
TAX CREDITS:
o Child Care Provider/Address and Social Security
Number or Employer Identification Number
o Adoption Expenses
o Retirement Savings Contributions
Liberty Tax professionals are available for your tax needs. Please call your local Liberty Tax office for further information.