The IRA FAQ's

WHAT IS A TRADITIONAL IRA?
WHO CAN SET UP A TRADITIONAL IRA?
WHEN CAN A TRADITIONAL IRA BE SET UP?
HOW MUCH CAN BE CONTRIBUTED?
Spousal IRA Limit
WHEN CAN CONTRIBUTIONS BE MADE?
HOW MUCH CAN YOU DEDUCT?
CAN YOU MOVE RETIREMENT PLAN ASSETS?
Trustee-to-Trustee Transfer:
Rollovers:
Rollovers Completed after the 60-day Period:
Qualified Domestic Relations Order
WHEN CAN YOU WITHDRAW OR USE ASSETS?
WHEN MUST YOU WITHDRAW ASSETS? WHAT ARE REQUIRED MINIMUM DISTRIBUTIONS?
ARE DISTRIBUTIONS TAXABLE?
Distributions Fully or Partly Taxable:
Fully Taxable
Partly Taxable
WHAT ACTS RESULT IN PENALTIES OR ADDITIONAL TAXES?
WHAT IS THE "AGE 59¾ RULE"
WHAT IS A ROTH IRA?
WHEN CAN A ROTH IRA BE SET UP?
CAN YOU CONTRIBUTE TO A ROTH IRA?
CAN YOU MOVE AMOUNTS INTO A ROTH IRA?
ARE QUALIFIED DISTRIBUTIONS TAXABLE?
MUST YOU WITHDRAW OR USE YOUR ROTH IRA ASSETS?
RETIREMENT SAVINGS CONTRIBUTIONS CREDIT
WHERE CAN I GET TAX HELP?


WHAT IS A TRADITIONAL IRA?
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:

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WHO CAN SET UP A TRADITIONAL IRA?
You can set up and make contributions to a traditional IRA if: (1) You (or, if you file a joint return, your spouse) received taxable compensation during the year, and (2) You were not age 70¾ 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.

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WHEN 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.

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HOW MUCH CAN BE CONTRIBUTED?
General Limit:
The most that can be contributed to your traditional IRA is the smaller of the following amounts:
If you have more than one IRA the limit applies to the total contributions made on your behalf to all your traditional and or Roth IRAs for the year.

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Spousal IRA Limit
If you file a joint return the most that can be contributed for the year to your IRA is the smaller of the following two amounts: 1. $4,000 ($5,000 if you are age 50 or older for 2006), or 2. The total compensation includible in the gross income of both you and your spouse for the year.

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 $8,000 (9000 if only one of you is age 50 or older or $10,000 if both of you are age 50 or older).

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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 must be in the form of money (cash, check, or money order). Property cannot be contributed. However, you may be able to transfer or roll over certain property from one retirement plan to another.

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HOW MUCH CAN YOU DEDUCT?
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 of your traditional IRAs of up to the lesser of:
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 single or head of household and your gross income (modified AGI) is $50,000 or less THEN you can take a full deduction. If your MAGI is more than $50,000 but less than $60,000 you get a partial deduction. If you make $60,000 or more you do not get a deduction. IF your filing status is married filing jointly or qualifying widow(er) and you make $70,000 or less you get a full deduction. If you make more than $70,000 but less than $80,000 you get a partial deduction. If you make over $80,000 you get no deduction for your contribution.

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 you are single, married or head of household and you are not covered under a plan at work, you can take a full deduction regardless of your income. If you are married filing jointly or separately with a spouse who is a stay at home parent or a spouse not covered by a plan at work, then you can make up to $150,000 and take a full deduction. If you make more than $150,000 but less than $160,000 you can take a partial deduction. Above $160,000 and you do not get a deduction.

* If your income is above the limits and you do not get a full deduction, it may make more sense to establish a Roth IRA. The limits are higher and there is not a deduction. The tax benefit is the ability to take the money out tax free.

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CAN YOU MOVE RETIREMENT PLAN ASSETS?
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.

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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. 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.

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Rollovers:
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."

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Rollovers Completed after the 60-day Period:
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 events beyond your reasonable control. In the absence of a waiver, amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer's plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% additional tax on early distributions as discussed later under Early Distributions.

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Qualified Domestic Relations Order
A domestic relations order is a judgment, decree, or order (including approval of a property settlement agreement) that is issued under the domestic relations law of a state. A "qualified domestic relations order" gives to an alternate payee (a spouse, former spouse, child, or dependent of a participant in a retirement plan) the right to receive all or part of the benefits that would be payable to a participant under the plan. The order requires certain specific information, and it cannot alter the amount or form of the benefits of the plan.

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WHEN CAN YOU WITHDRAW OR USE ASSETS?
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 59 ¾.

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WHEN MUST YOU WITHDRAW ASSETS? WHAT ARE REQUIRED MINIMUM DISTRIBUTIONS?
If you are the owner of a traditional IRA, you must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70 ¾.

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April 1 of the year following the year in which you reach age 70 ¾ is referred to as the required beginning date. You must receive at least a minimum amount for each year starting with the year you reach age 70 ¾ (your 70 ¾ year).

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If you do not (or did not) receive that minimum amount in your 70 ¾ year, then you must receive distributions for your 70 ¾ year by April 1 of the next year.

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If an IRA owner dies after reaching age 70 ¾, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.

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ARE DISTRIBUTIONS TAXABLE?
Distributions from traditional IRAs that you include in income are taxed as ordinary income.

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Distributions Fully or Partly Taxable:
Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.

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Fully Taxable
If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Because you have no basis in your IRA, any distributions are fully taxable when received. See Reporting and Withholding Requirements for Taxable Amounts, later.

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Partly Taxable
If you made nondeductible contributions to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.

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WHAT ACTS RESULT IN PENALTIES OR ADDITIONAL TAXES?
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.
Taking early distributions.
Allowing excess amounts to accumulate (failing to take required distributions).
Borrowing money from it.
Selling property to it.
Receiving unreasonable compensation for managing it.
Using it as security for a loan.
Buying property for personal use (present or future) with IRA funds.

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WHAT IS THE "AGE 59¾ RULE"
Generally, if you are under age 59¾, 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 59¾ 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.

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WHAT IS A ROTH IRA?
A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the same rules that apply to a traditional IRA (defined below). It can be set up as either an account or an annuity. To be a Roth IRA, the account must be designated as a Roth IRA when it is set up. You cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions are tax free. Contributions can be made to your Roth IRA after you reach age 70 ¾ and you can leave amounts in your Roth IRA as long as you live.

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WHEN CAN A ROTH IRA BE SET UP?
You can set up a Roth IRA at any time. However, the time for making contributions for any year is limited.

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CAN YOU CONTRIBUTE TO A ROTH IRA?
Generally, you can contribute $4000 to a Roth IRA ($5000 if you are over 50 years old) if you have taxable compensation and your modified AGI is less than:

$150,000 for married filing jointly or qualifying widow(er). The amount is phased out between $150,000 and $160,000);

$95,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year. The amount is phased out between $95,000 and $110,000)

Contributions can be made to your Roth IRA regardless of your age.

You can contribute to a Roth IRA for your spouse under the same rules as a Traditional IRA and you file jointly, and your modified AGI is less than $160,000.

If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit is a total of $4,000 combined (or $5,000 if you are over 50 years old).

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CAN YOU MOVE AMOUNTS INTO A ROTH IRA?
You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to re-characterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from one Roth IRA to another Roth IRA.

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ARE QUALIFIED DISTRIBUTIONS TAXABLE?
No. A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements:
  1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
  2. The payment or distribution is: (a) Made on or after the date you reach age 59¾, (b) Made because you are disabled, (c) Made to a beneficiary or to your estate after your death, or (d) One that meets the requirements listed under First home (up to a $10,000 lifetime limit). (e) The distributions are part of a series of substantially equal payments. (f) You have significant un-reimbursed medical expenses. (g) You are paying medical insurance premiums after losing your job. (h) The distributions are not more than your qualified higher education expenses. (i) The distribution is due to an IRS levy of the qualified plan.

If you receive a distribution that is not a qualified distribution, you may have to pay ordinary income tax and a 10% penalty tax on distributions and conversion amounts (The tax is due on earnings only. No tax is due on your after tax contributions unless they are converted).

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MUST YOU WITHDRAW OR USE YOUR ROTH IRA ASSETS?
You are not required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs.

Minimum distributions. You cannot use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs.

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RETIREMENT SAVINGS CONTRIBUTIONS CREDIT
You may be able to take a tax credit if you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an individual retirement arrangement (IRA). You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). This credit could reduce the federal income tax you pay dollar for dollar.

Can you claim the credit? If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if all of the following apply.

1. You were born before January 2, 1988.
2. You are not a full-time student (explained later).
3. No one else, such as your parent(s), claims an ex- emption for you on their tax return.
4. Your adjusted gross income is not more than: (a) $50,000 if your filing status is married filing jointly, (b) $37,500 if your filing status is head of household (with qualifying person), or (c) $25,000 if your filing status is single, married filing separately, or qualifying widow(er) with dependent child.

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WHERE CAN I GET TAX HELP?
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate. The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review. To contact your Taxpayer Advocate:

Call toll-free 877-777-4778.
Call, write, or fax the Taxpayer Advocate office in your area.
Call 1-800-829-4059 if you are a TTY/TDD user.

Visit www.irs.gov/advocate

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