© 2016 Joan E. Emery
1. As of September 30, 2014, the total U. S. assets in Individual Retirement Accounts (“IRAs”) was estimated to be 7.3 trillion dollars. This total includes Traditional IRAs and Roth IRAs.
2. In September of 2014, it was estimated that IRAs comprised 11% of the financial assets of the average American family.
3. The general rules regarding Traditional IRAs are as follows:
a. If income limits and all other applicable rules are complied with, contributions are tax deductible, but only up to the contribution limits.
b. Earnings on contributions are tax-deferred.
c. Income Limits
1. Individuals and Heads of Household – full deduction up to contribution limit if person is not a participant in an employer sponsored plan/deduction is phased out if the person is covered by an employer sponsored plan and modified adjusted gross income exceeds certain levels.
2. Married Filing Jointly
a) Full deduction, without regard to income, up to contribution limits if both spouses are not covered by an employer sponsored plan.
b) If either spouse is covered by an employer sponsored plan, the deduction may be reduced if a calculation, which considers the spouses’ modified adjusted gross income, applies. Different income levels trigger the phase out of the deduction based on which spouse is covered by an employer sponsored plan.
3. Married Filing Separately – special rules apply
d. Deductible Contribution Limits
1. Contributions are permitted if the person is under age 70.5 and have earned income. A spouse is permitted to make a contribution if he or she is under age 70.5 and a joint income tax return is filed.
2. Through age 49: lesser of 100% of earned income or $5,500 per person.
3. Age 50 or Over: lesser of 100% of earned income or $6,500 per person.
e. Nondeductible Contribution Limits – A person may make a nondeductible contribution, but that nondeductible contribution is limited to the maximum allowable contribution minus the amount allowed as a deduction for that year.
f. Due Date of Contributions – Contributions may be made until the due date of the person’s return. An extension of time to file the return does not extend the
contribution due date.
g. Mandatory Distributions, referred to as Required Minimum Distributions,
must begin no later than April 1 following the calendar year when the person attains age 70.5.
h. Taxation of Distributions – This assumes no qualified rollover to another IRA or qualified retirement plan. However, Required Minimum Distributions cannot be rolled over.
1. Deductible contributions and any earnings are taxed at ordinary income tax rates.
2. Non-deductible contributions are not subject to income taxes.
3. The taxable and nontaxable portions of a distribution are calculated using specific rules.
4. A 10 percent additional tax applies unless one of the following exceptions applies:
a) the recipient is at least age 59.5;
b) certain disability requirements are met;
c) the distribution is used to pay:
1) eligible medical expenses;
2) eligible unemployed worker’s medical insurance premiums;
3) up to $10,000 of qualified first-time home buyer expenses;
4) qualified higher education expenses;
d) certain other specified exception requirements are met.
i. Allowable Asset Contributions – Contributions to IRAs are made by cash, check, or money order. Contributions of securities, real property, etc. are not permitted. However, different rules apply to rollover contributions.
j. IRA Investments
1. IRAs may be invested in most kinds of investments.
2. IRAs cannot be invested in collectibles, such as antiques and stamps. Some types of coins are permissible investments.
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