Source: www.irs.gov
A traditional IRA is any IRA that is not a Roth or 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.
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.
Both spouses have compensation.
If both you and your spouse have compensation and are under age 70½, each of you can set up an IRA. You cannot both participate in the same IRA. If you file a joint return, only one of you needs to have compensation.
What Is Compensation?
Generally, compensation is what you earn from working. Compensation includes all of the items discussed next (even if you have more than one type).
Wages, salaries, etc.
Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. 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 IRA purposes only if shown in box 1 of Form W-2.
Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. 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 IRA purposes only if shown in box 1 of Form W-2.
Commissions
An amount you receive that is a percentage of profits or sales price is compensation.
An amount you receive that is a percentage of profits or sales price is compensation.
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:
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.
Self-employment loss
If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
Alimony and separate maintenance
For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.
For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.
Military differential pay
For IRA purposes, compensation includes military differential pay you receive. Military differential payments are those payments made by some employers to employees who have been called to active duty in the uniformed services for a period of more than 30 days. Beginning in 2009, these payments will be reported in box 1 (Wages, tips, other compensation) of Form W-2.
For IRA purposes, compensation includes military differential pay you receive. Military differential payments are those payments made by some employers to employees who have been called to active duty in the uniformed services for a period of more than 30 days. Beginning in 2009, these payments will be reported in box 1 (Wages, tips, other compensation) of Form W-2.
Nontaxable combat pay
If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2009 Form W-2 with code Q. If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you could contribute more for those years than you already have, you could have made additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions are treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:
If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2009 Form W-2 with code Q. If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you could contribute more for those years than you already have, you could have made additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions are treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:
- 3 years from the date you filed your original return for the year for which you made the contribution,
- 2 years from the date you paid the tax due for the year for which you made the contribution, or
- 1 year from the date on which you made the contribution.
Table 1-1. Compensation for Purposes of an IRA
| Includes | Does not include |
| wages, salaries, etc. | earnings and profits from property. |
| commissions | interest and dividend income |
| self-employment income | pension or annuity income |
| alimony and separate maintenance | deferred compensation |
| military differential pay | income from certain partnerships |
| nontaxable combat pay | any amounts you exclude from income |
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 (other than combat pay) you exclude from income, such as foreign earned income and housing costs.
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.
How Can a Traditional IRA Be Set Up?
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. The requirements for the various arrangements are discussed below.
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.
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.
- The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
- The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
- Contributions, except for rollover contributions, must be in cash. See Rollovers.
- You must have a nonforfeitable right to the amount at all times.
- Money in your account cannot be used to buy a life insurance policy.
- Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
- You must start receiving distributions by April 1 of the year following the year in which you reach age 70½.
When Must You Withdraw Assets? (Required Minimum Distributions)
You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent’s IRA.
The amount that must be distributed each year is referred to as the required minimum distribution.
Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment.
For 2009, you are not required to take a minimum distribution from your traditional IRA (as well as most defined contribution plans). This waiver applies to IRA participants as well as to beneficiaries. The waiver also applies to you if you turn 70½ in 2009 and delay your 2009 required minimum distribution until April 1, 2010. The waiver does not apply to minimum required distributions for 2008, even if you turned 70½ in 2008 and chose to take the 2008 required minimum distribution by April 1, 2009. If you are a beneficiary receiving distributions over a 5-year period, you generally can now waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period. If you received a distribution in 2009 that would otherwise be a required minimum distribution, you generally can roll over that amount into another IRA or eligible retirement plan within 60 days of the distribution. For 2009 RMDs, the 60-day rollover period was extended so that it ended no earlier than November 30, 2009, or 60 days after the distribution was received, whichever was later.
If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ 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 70½ (your 70½ year). If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year. If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date. If you reach age 70½ in 2009, you are not required to receive your first distribution by April 1, 2010 due to the special waiver for 2009. Your first required distribution however must be made for 2010 by December 31, 2010.
Caution
Even if you begin receiving distributions before you reach age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date.
If, in any year, you receive more than the required minimum distribution for that year, you will not receive credit for the additional amount when determining the minimum required distributions for future years. This does not mean that you do not reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you cannot treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year.
The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year.
If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year.
If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution. For more information on rules for annuities, see Regulations section 1.401(a)(9)-6. These regulations can be read in many libraries and IRS offices.
For purposes of figuring your required minimum distribution, your marital status is determined as of January 1 of each year. If your spouse is a beneficiary of your IRA on January 1, he or she remains a beneficiary for the entire year even if you get divorced or your spouse dies during the year. For purposes of determining your distribution period, a change in beneficiary is effective in the year following the year of death or divorce.
If your spouse is the sole beneficiary of your IRA, and he or she dies before you, your spouse will not fail to be your sole beneficiary for the year that he or she died solely because someone other than your spouse is named a beneficiary for the rest of that year. However, if you get divorced during the year and change the beneficiary designation on the IRA during that same year, your former spouse will not be treated as the sole beneficiary for that year.
Figure your required minimum distribution for each year by dividing the IRA account balance (defined next) as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy.
The IRA account balance is the amount in the IRA at the end of the year preceding the year for which the required minimum distribution is being figured.
Contributions increase the account balance in the year they are made. If a contribution for last year is not made until after December 31 of last year, it increases the account balance for this year, but not for last year. Disregard contributions made after December 31 of last year in determining your required minimum distribution for this year.
The IRA account balance is adjusted by outstanding rollovers and recharacterizations of Roth IRA conversions that are not in any account at the end of the preceding year. For a rollover from a qualified plan or another IRA that was not in any account at the end of the preceding year, increase the account balance of the receiving IRA by the rollover amount valued as of the date of receipt. If a conversion contribution or failed conversion contribution is contributed to a Roth IRA and that amount (plus net income allocable to it) is transferred to another IRA in a subsequent year as a recharacterized contribution, increase the account balance of the receiving IRA by the recharacterized contribution (plus allocable net income) for the year in which the conversion or failed conversion occurred.
Distributions reduce the account balance in the year they are made. A distribution for last year made after December 31 of last year reduces the account balance for this year, but not for last year. Disregard distributions made after December 31 of last year in determining your required minimum distribution for this year.
Example 1.Laura was born on October 1, 1938. She reaches age 70½ in 2009. Her required beginning date would normally be April 1, 2010. However, for 2009, Laura does not have to take a required minimum distribution. Her first distribution would be for 2010 which she must receive by December 31, 2010. As of December 31, 2009, her account balance was $25,600. No rollover or recharacterization amounts were outstanding. Using Table III in Appendix C, the applicable distribution period for someone her age (72) is 25.6 years. Her required minimum distribution for 2010 is $1,000 ($25,600 ÷ 25.6). That amount is distributed to her in December 2010.
Example 2.Joe, born October 1, 1938, reached 70½ in 2009. His wife (his beneficiary) turned 56 in September 2009. For 2009, Joe does not have to take a required minimum distribution. His first distribution would be for 2010, which he must receive before December 31, 2010. Joe’s IRA account balance as of December 31, 2009, is $29,200. Because Joe’s wife is more than 10 years younger than Joe and is the sole beneficiary of his IRA, Joe uses Table II in Appendix C. Based on their ages at year end (December 31, 2010), the joint life expectancy for Joe (age 72) and his wife (age 57) is 29.2 years. The required minimum distribution for 2010, Joe’s first distribution year, is $1,000 ($29,200 ÷ 29.2). This amount is distributed to Joe in December, 2010.
This is the maximum number of years over which you are allowed to take distributions from the IRA. The period to use for 2009 is listed next to your age as of your birthday in 2009 in Table III in Appendix C.
Life expectancy. If you must use Table I, your life expectancy for 2010 is listed in the table next to your age as of your birthday in 2010. If you use Table II, your life expectancy is listed where the row or column containing your age as of your birthday in 2010 intersects with the row or column containing your spouse’s age as of his or her birthday in 2010. Both Table I and Table II are in Appendix C.
Distributions during your lifetime. Required minimum distributions during your lifetime are based on a distribution period that generally is determined using Table III (Uniform Lifetime) in Appendix C. To figure the required minimum distribution for 2010, divide your account balance at the end of 2009 by the distribution period from the table. This is the distribution period listed next to your age (as of your birthday in 2010) in Table III in Appendix C, unless the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you.
Example.You own a traditional IRA. Your account balance at the end of 2009 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 6 years younger than you. You turn 75 years old in 2010. You use Table III. Your distribution period is 22.9. Your required minimum distribution for 2010 would be $4,367 ($100,000 ÷ 22.9). For 2009, you do not have to take a required minimum distribution.
Sole beneficiary spouse who is more than 10 years younger. If the sole beneficiary of your IRA is your spouse and your spouse is more than 10 years younger than you, use the life expectancy from Table II (Joint Life and Last Survivor Expectancy). The life expectancy to use is the joint life and last survivor expectancy listed where the row or column containing your age as of your birthday in 2010 intersects with the row or column containing your spouse’s age as of his or her birthday in 2010. You figure your required minimum distribution for 2010 by dividing your account balance at the end of 2009 by the life expectancy from Table II (Joint Life and Last Survivor Expectancy) in Appendix C.
Example.You own a traditional IRA. Your account balance at the end of 2009 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 11 years younger than you. You turn 75 in 2010 and your spouse turns 64. You use Table II. Your joint life and last survivor expectancy is 23.6. Your required minimum distribution for 2010 would be $4,237 ($100,000 ÷ 23.6).
Distributions in the year of the owner’s death. The required minimum distribution for the year of the owner’s death depends on whether the owner died before the required beginning date. Note: you figure the required minimum distribution for the year in which an IRA owner dies as if the owner lived for the entire year.