Helpful Resources

Q: Who may contribute to a Traditional IRA?

A: If you are under the age of 70½ and you earn an income, you may contribute to a Traditional IRA. If you are married, your nonworking (non–income-producing) spouse may also contribute to their own IRA. A Spousal IRA essentially allows a nonworking spouse to set aside money for retirement up to the limits set by the Internal Revenue Code (IRC).

Q: How much can I contribute?

A: The maximum amount you can contribute each year to your IRA is $5,000 ($10,000 for a married couple filing jointly).¹

If you are age 50 or older by December 31 of the current tax year, you may also make an additional “catch-up” contribution of $1,000 to your IRA, bringing your total annual contribution limit to $6,000. This “catch-up” provision also applies to spousal IRAs.²

If you are married and file a joint return, your total IRA contributions must be the lesser of two times the individual contribution amount ($10,000) or 100 percent of your combined incomes.

Q: How much of my contribution is income tax-deductible?

A: As long as you meet certain income and other requirements, all of your contributions to a traditional IRA will be fully tax-deductible. If you are married and file jointly, your spouse’s contributions to their IRA will also be fully tax-deductible.

If you or your spouse participates in an employer-sponsored retirement plan, you may still contribute to a traditional IRA. However, the amount of your contribution that is income tax-deductible may be reduced or even phased out entirely depending on your income. If you are married and file jointly but only one spouse contributes to an employer-sponsored retirement plan, the amount of the contribution made by the spouse who does not participate in the employer-sponsored plan may also be reduced or phased out based on your income.

If you or your spouse contribute to an employer-sponsored retirement plan and your income exceeds the limits set by the IRS, you may still make nondeductible contributions to an IRA in order to take advantage of its tax-deferred growth and other features.

Q: What happens when I withdraw money from my traditional IRA?

A: When you begin withdrawing money from your IRA, you will owe income taxes on all of your earnings and on any tax-deductible contributions you made. You will not owe income taxes on any contributions made with after-tax dollars.

Because IRAs are designed to help you accumulate money for retirement, there are specific rules and regulations governing when you can, or must, begin making withdrawals. Failure to abide by these rules can result in substantial tax penalties.

Generally, you may begin taking penalty-free withdrawals from your IRA when you reach age 59½. If you withdraw money prior to age 59½, in addition to any regular income taxes you may owe, you may also be subject to a 10 percent tax penalty. This tax penalty will be waived, however, if you withdraw money prior to age 59½ for one or more of the following reasons*:

• First-time home buyer purchases
• Qualified higher education expenses
• Payments made to you based on your life expectancy
• Health insurance premium payments made while you are unemployed
• Medical expenses that exceed 7.5 percent of your adjusted gross income
• Disability or death

You must begin taking money out of traditional IRAs once you reach age 70½, even if you do not need the income. Such withdrawals are called required minimum distributions (RMDs). You must take your first RMD by April 1 of the year after you reach age 70½. Thereafter, your RMD must be taken each year by December 31. Failure to take your RMD in any given year will result in a 50 percent excise tax on the amount not taken. Depending on the size of your IRA, that could add up to a lot of money.**

Q: Can I roll over money from other retirement plans into my traditional IRA?

A: Yes. Moving money from a qualified retirement plan into a traditional IRA is called a rollover. You may do a rollover or transfer money into a traditional IRA from any of the following qualified retirement plans:

• 401(k)
• 401(a)
• 457(b)
• 403(b)
• Another traditional IRA
• SIMPLE IRA after two years of participation
• A lump-sum distribution from a qualified pension

* For more detailed information, see IRS Publication 590 at www.irs.gov.
** RMD has been suspended for 2009 due to the Worker, Retiree, and Employee Recovery Act of 2008.

Q: What is the withholding trap?

A: The withholding trap occurs when you have to pay income taxes, and possibly penalties, on money you are transferring from one retirement plan to another. The trap is “sprung” when you request a distribution from your qualified plan in the form of a check made payable to you. Here’s why: even if you intend to deposit the entire check into your IRA, your plan provider is required to withhold 20 percent of any retirement plan distribution paid directly to you. The tax laws state that once 20 percent is withheld (and thus, not deposited into your IRA), it becomes taxable to you as regular income – even if you never received it. And if you have not yet attained age 59½, you may also be subject to a 10 percent tax penalty on the amount withheld.

As a result, instead of transferring the full amount into your IRA, a portion of your money is lost to taxes and penalties.

Q: Can the withholding trap be avoided?

A: Yes. The way to avoid the withholding trap is to have your assets rolled directly into your IRA from your tax-qualified pension, profit-sharing plan, or other retirement plan. Do not have the check made payable to you. If your funds are rolled directly from one plan provider to another, in essence, from your old retirement account into your new one, you will not be subject to taxes or penalties on the amounts rolled over.

Q: When am I eligible to roll funds from one qualified plan to another?

A: Generally, you can roll funds from one qualified plan to a new one following a “trigger” event such as:

• Separation from service^†
• Retirement
• Termination of your old plan

You may also be able to make an “in-service withdrawal,” which is a withdrawal allowed by your plan provider even if none of the above “trigger” events occur.

^†Early withdrawal penalties are not applicable when distributions are made to employees aged 55 or older from a qualified plan after separation from service. This exception does not apply to IRAs.

Q: Can I roll a distribution into more than one IRA?

A: Yes. But again, unless you roll the funds from your existing qualified plan directly into your new IRAs, a portion of your funds may be subject to federal withholding taxes.

Q: Can I place only part of the distribution into a rollover IRA?

A: Yes. However, you will have to pay ordinary income tax on the funds that you decide to keep. If you are under age 59½, you may also incur an additional 10 percent tax penalty.

Q: Are after-tax contributions eligible for a rollover?

A: Yes. After-tax contributions may be rolled over from qualified plans to an IRA. If you roll over after-tax contributions into a Traditional IRA, you are required to keep track of the after-tax dollars and file form 8608 with the IRS.

Q: Can I roll my distribution into an existing IRA?

A: Yes, but the same rules and regulations noted above will apply.

Q: Are there any special rollover considerations if I have been receiving required minimum distributions or have attained age 70½?

A: Yes. Before you request a rollover from your qualified plan or from one IRA to another IRA, you should request payment of your required minimum distribution for that year.

1 The maximum contribution for tax year 2009 is $5,000. The maximum contribution amount increases in $500 increments annually thereafter.
2 The $1,000 catch-up contribution limit does not increase incrementally.