IRA Tax Guide
An Individual Retirement Account (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 and Roth. 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.
The contribution limit to a traditional IRA and/or a Roth IRA is generally up to $5,500 for each taxpayer. Taxpayers age 50 or over can contribute up to $6,500. The maximum an individual can contribute to any type of IRA is $5,500 (or $6,500 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.
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 At that age, there is a required minimum distribution (RMD) that must be withdrawn each year.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 adjusted gross income (AGI). At the higher amount, no deduction is allowed, but nondeductible contributions can still be made. The AGI phase-out range for 2016 is:
- $98,000 - $118,000 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)
- $61,000 - $71,000 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.
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 amount that is included in your income.
Some exceptions to the 10% additional tax include: paying unreimbursed medical expenses that exceed the limit 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.
There is no deduction allowed on the tax return. Your contribution amount to a Roth IRA is limited when your adjusted gross income reaches $117,000 ($184,000 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.
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.
Converting an IRA
You can convert a traditional IRA to a Roth IRA regardless of your filing status and modified AGI. Converting a Roth IRA back to a traditional IRA can be done through recharacterization. If your return has already been filed for the year, you will need to file Form 1040X, Amended U.S. Individual Income Tax Return, to recover the taxes paid on the conversion. This needs to be submitted by the due date for amended returns. More information on IRA conversions and recharacterizations can be found on the IRS website.
Military Combat Pay
Nontaxable combat pay is compensation for IRA contribution purposes. View our Military Tax Guide for more information.
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. Ask your tax preparer if you qualify for this credit.
Updated for 2015 Tax Year