Traditional IRA Help

Traditional IRAs offer the following benefits.

• Independence – Individuals may open and fund IRAs without any employer participation
• Immediate tax advantages – Earnings remain tax-deferred until distributed
• Possible tax deductions – Eligible individuals can make deductible contributions
• Accessibility – Individuals may distribute IRA assets at any time
• Flexibility – No annual contribution requirement

To make a regular Traditional IRA contribution, the IRA owner must

• not have attained his 70½ year, and
• have eligible compensation (generally earned income) equal to or greater than the Traditional IRA contribution amount.

An IRA owner may contribute to all her Traditional and Roth IRAs up to the lesser of

• 100 percent of earned income, or
• $5,500 for 2015 and for 2016 (plus catch-up contributions, if eligible).

IRA owners age 50 or older by the end of the tax year may increase their IRA contributions to help "catch up" on their retirement savings, for a total maximum IRA contribution of:

• $6,500 for 2015 and
• $6,500 for 2016.

A simplified employee pension (SEP) plan is a retirement plan that allows employers to contribute to employees’ Traditional IRAs. SEP plan contributions are subject to different contribution limits than Traditional IRA contributions. Once an employer makes a SEP plan contribution to an IRA, all the general Traditional IRA rules and regulations apply. SEP plan contributions do not affect the individual's ability to make Traditional IRA contributions. The following characteristics apply to SEP plan contributions.

• The maximum SEP plan contribution is the lesser of 25 percent of compensation up to $53,000 for 2015 and $53,000 for 2016.
• SEP contributions are always 100 percent vested.
• Eligible participants who are age 70½ or older may receive SEP plan contributions.

Individuals must make regular contributions to Traditional and Roth IRAs by the due date of their federal income tax returns (generally April 15), not including extensions. If the deadline for filing an individual's income tax return falls on a Saturday, Sunday, or legal holiday, he will have until the following business day to make his contribution.

Contributions made between January 1 and April 15 of one year for the previous year are called prior-year contributions.

Yes. Traditional IRA owners are permitted to make nondeductible IRA contributions if they are not eligible for a tax deduction or if they choose to not take a deduction. The combined total of deductible and nondeductible contributions cannot exceed the annual contribution limit of $5,500 for 2015 and for 2016, plus catch-up contributions if eligible, or 100 percent of earned income, whichever is less. IRA owners track their nondeductible IRA contributions by filing Form 8606, Nondeductible IRAs, with their federal income tax returns.

One of the benefits of contributing to a Traditional IRA is that the contribution may be tax deductible. Whether a contribution or a portion of a contribution is deductible depends on active participation (participating in or receiving contributions) in an employer-sponsored retirement plan, marital status, and modified adjusted gross income (MAGI).

IRA Deductibility Phase-Out Ranges for Active Participants

Certain individuals may receive a nonrefundable tax credit (not to exceed $1,000) for their regular IRA contributions. Eligible individuals determine their credit on IRS Form 8880, Credit for Qualified Retirement Savings Contributions, by multiplying their total Traditional and Roth IRA regular contributions and retirement plan deferrals of up to a maximum of $2,000 by an applicable percentage (below). To be eligible for the tax credit, an individual must

• have attained age 18 before the end of the taxable year,
• not be a dependent or a full-time student, and
• have adjusted gross income (AGI) within limits.

The following chart highlights the income levels for eligibility for the tax credit and the applicable percentage used to calculate the tax credit.

Please consult with your tax advisor for additional information.

IRA owners may wish to move their IRAs from one financial organization to another. Transfers and rollovers are two methods of moving assets from one IRA to another IRA of the same type.

A transfer is a direct movement of assets between like IRAs. A transfer generally is from one financial organization to another financial organization, but may occur between IRAs at the same financial organization. Although IRA owners direct the asset transfer, they do not have actual receipt of the assets. An IRA owner may make an unlimited number of transfers in a year. The transfers may be for all or any part of an IRA balance. Transfers are not reported to the IRS.

An IRA-to-IRA rollover is another method of moving assets, tax-free from one IRA to another IRA of the same type. With rollovers, the IRA owner, surviving spouse beneficiary, or former spouse actually receives the assets through a distribution before rolling it over to another IRA. A distribution that is eventually rolled over to an IRA is treated like any other type of distribution at the time it is taken from the IRA. Consequently, the withholding rules apply. The distributing financial organization reports the IRA distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and the receiving financial organization reports the rollover contribution on Form 5498,IRA Contribution Information.

Contributions made by an employer through a retirement plan known as a simplified employee pension (SEP) plan are contributed to Traditional IRAs. Once SEP plan assets are in the Traditional IRA, all the general Traditional IRA rules and regulations apply. They do not, however, affect an IRA owner’s ability to make regular Traditional IRA contributions. But participating in the SEP plan makes an individual an active participant for purposes of Traditional IRA deductions.

Traditional IRAs also may receive rollovers of pretax and after-tax assets from employer-sponsored retirement plans, which include 401(a) and 403(a) qualified retirement plans (QRPs), 403(b) plans, governmental 457(b) plans, the federal Thrift Savings Plan, and SIMPLE IRA plans (after two years of participation in the SIMPLE IRA).

Recharacterized assets also may be contributed to a Traditional IRA.

Unlike many employer-sponsored retirement plans in which access to assets might be limited until the participant has a change of employment or reaches retirement age, access to IRA assets is guaranteed, always. Most Traditional IRA distributions taken before the IRA owner reaches age 59½ are subject to a 10 percent early distribution penalty tax. This is to discourage people from taking Traditional IRA distributions at an early age rather than keeping the assets for retirement. The 10 percent early distribution penalty tax does not apply in the following situations.

• Age 59½
• Death
• Disability
• Certain medical expenses
• Health insurance premiums following unemployment
• First home buyer expenses
• Higher education expenses
• IRS levy
• Series of substantially equal periodic payments
• Qualified reservist distributions

IRS Publication 590, Individual Retirement Arrangements (IRAs), provides more detail on these penalty tax exceptions.

Traditional IRA distributions become mandatory beginning in the year that a Traditional IRA owner turns age 70½. These mandatory distributions are called required minimum distributions (RMDs). IRA owners must begin taking RMDs by April 1 of the year following the year they turn 70½. These distributions are based on the IRA balance divided by the applicable distribution period. Because IRAs were created to provide income during retirement—not to be a tax shelter— IRA owners failing to take their RMDs are subject to a 50 percent excess accumulation penalty tax on the assets that should have been distributed but were not.

The difference between a Traditional and Roth IRA can be summarized by the following comparison.

Each of the following factors determines whether a Traditional IRA or a Roth IRA is the right choice for you.

• Anticipated tax rate at retirement
• Years to retirement
• Current tax rate
• Earnings rate assumptions
• Distribution plans at retirement