Individual Retirement Account IRA

The IRA was first introduced in 1974 as part of the Employee Retirement Income Security Act (ERISA).  It was originally created for employees who were not active participants in a retirement plan at work and allowed investors to set aside a certain amount of their earned income per year for retirement. 

Eligibility

Now-anyone under age 70 1/2 with earned income can contribute to a IRA.  You'll qualify if you work full or part time and can use the IRA account in addition to a retirement plan at work such as a 401k or a 403b plan or self employed retirement plans.

Deductible vs Non-Deductible

Your contributions may be "deductible" or  they may be "non-deductible", often called an after-tax contribution.

The difference between a deductible and a nondeductible traditional IRA is whether you qualify to subtract your annual contribution from your gross income when you file your income tax return. If you qualify, your IRA is deductible. If you don’t, it’s nondeductible.

You can deduct your IRA contribution if you qualify on either of two grounds:

• If you are married and neither you nor your spouse is an active participant in an employer plan, you may take a tax deduction for the full contribution amount.  If one of you is a active participant, then your income determines whether you are allowed to take a tax deduction.  Generally, an individual is considered to be an active participant if he or she is covered by a qualified plan such as a 401k or 403b plan at some point during the year.
• If you are covered by a retirement plan at work, you still may be able to deduct all or part of your IRA contribution. It depends on your income.  
   
  Here's the guidelines for 2017:

Single or Head of Household 

Active in employer plan and less than $62,000 allows a full deduction.   $62,000-$72,000 allows a partial deduction.  Above $72,000 not eligible.

Married Filing Jointly

Active in employer plan and less than $99,000 allows a full deduction.  $99,000-$119,000 allows a partial deduction.  Above $119,000 not eligible.

Non-Deductible Contributions

Beginning with the 1987 tax year, Congress created the ability for an individual to make non-deductible contributions to an IRA.  These non-deductible contributions represent money in an IRA which has all ready been taxed.  When distribution occur later, a portion of each distribution will be treated as tax-free return of the nondeductible contributions. 

The IRA owner will be required to file Form 8606

Traditional IRA Contribution Limits

Your maximum annual contribution for 2017 is $5,500 or 100% of compensation, whichever is less.

Individuals who are age 50 or older can contribute an additional $1000 per year.  This is known as a Catch-up contribution.

Maintaining an IRA

Once you've established the IRA, you can make contributions each year, some years, or skip years.  It's really your choice.  There is no requirement to contribute each year.  Also, you can have multiple IRA accounts including Roth, Traditional IRA and Rollover IRA accounts.   You'll be able to make investment changes in these accounts each year and transfer IRA's from other institutions.

IRS Publication 590 is available in our Links section.  This publication explains IRA's in detail. 

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