...
An ordinary IRA, also called a Traditional IRA, is any IRA that is not a Roth IRA or a SIMPLE IRA. An Individual Retirement Account (IRA), in general, allows a participant to deduct some or all of their contributions to the account. The contributions and earnings are not taxed until distributed.
Even those who are covered by a retirement plan through their employer are able to contribute to a traditional IRA. However, all or part of the contributions may not be deductible if they or their spouse are covered by an employer-sponsored retirement plan.
In order to be eligible to contribute to an IRA, an individual must be under the age of 70½ and have taxable income, such as wages, salaries, commissions, tips, bonuses, or self-employment.
Annual income limits
For the calendar year 2011, a participant who is covered by a retirement plan at work can deduct a reduced or phased out amount for contributions to a traditional IRA. The adjusted gross income (AGI) is limited to the following:
- More than $90,000 but less than $110,000 for a married couple filing a joint return or a qualifying widow(er),
- More than $56,000 but less than $66,000 for a single individual or head of household, or
If an individual lives with his spouse or files a joint return, and the spouse is covered by a retirement plan at work, but the individual is not, his deduction is phased out if his AGI is more than $169,000 but less than $179,000. If his AGI is greater than $179,000 he is not able to take a deduction for contributions to a traditional IRA. The difference between total IRA contributions and the IRA deduction amount, if any, is the nondeductible contribution.
Annual contribution limits
The contribution limit for the 2011 tax year is $5,000 for an individual. Those who are at least 50 years old are eligible to make “catch-up” contributions with an additional $1,000. The deadline for making a contribution to an IRA is the tax return due date.
An IRA can be set up with a variety of institutions: a bank, financial institution, mutual fund company, life insurance company, or through a brokerage, and must consist of a written document.
Withdrawals
Certain withdrawals are allowed from an IRA and are generally taxable. An individual can take withdrawals at age 59 ½ which will be taxed as ordinary income. However, withdrawals made prior to age 59 ½ may also be subject to a 10% penalty tax.
A required minimum distribution (RMD) must be taken by April 1 following the year in which a participant reaches age 70 ½. This is calculated each year by dividing the IRA account balance as of December 31 of the prior year by the person’s life expectancy. Tables are provided by the IRS for calculation purposes.
Rollovers
An IRA is permitted to be rolled over into a qualified retirement plan, assuming the plan allows it. In addition, several types of rollovers are permitted into an IRA. They include:
- Traditional IRA,
- Qualified retirement plan,
- Deferred compensation plan of a state or local government (section 457 plan), or
- Tax-sheltered annuity plan (section 403 plan).
Conversion to a Roth IRA
For one year only — 2010 — you can convert an IRA to a Roth IRA regardless of your income level. and the income taxes due on conversions can be spread over two years. So the 2010 conversion amount may be included as taxable income in 2011 and 2012.