Publication 590 |
2000 Tax Year |
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 a part of an employer or employee association trust account.
Individual Retirement 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 $2,000 a year. However, rollover
contributions and employer contributions to a simplified employee
pension (SEP), as explained in chapter 4,
can be more than $2,000.
- Contributions, except for rollover contributions, must be in
cash. See Rollovers, later.
- The amount in your account must be fully vested (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 70 1/2. See
When Must I Withdraw IRA Assets? (Required Distributions),
later.
Individual Retirement Annuity
You can set up an individual retirement annuity by purchasing an
annuity contract or an endowment contract from a life insurance
company.
An individual retirement annuity must be issued in your name as the
owner, and either you or your beneficiaries who survive you are the
only ones who can receive the benefits or payments.
An individual retirement annuity must meet all the
following requirements.
- Your entire interest in the contract must be nonforfeitable.
- The contract must provide that you cannot transfer any
portion of it to any person other than the issuer.
- There must be flexible premiums so that if your compensation
changes, your payment can also change. This provision applies to
contracts issued after November 6, 1978.
- The contract must provide that contributions cannot be more
than $2,000 in any year, and that you must use any refunded premiums
to pay for future premiums or to buy more benefits before the end of
the calendar year after the year you receive the refund.
- Distributions must begin by April 1 of the year following
the year in which you reach age 70 1/2. See When Must
I Withdraw IRA Assets? (Required Distributions), later.
Individual Retirement Bonds
The sale of individual retirement bonds issued by the federal
government was suspended after April 30, 1982. The bonds have the
following features.
- They stop earning interest when you reach age 70 1/2. If you die, interest will stop 5 years after your death, or on
the date you would have reached age 70 1/2, whichever is
earlier.
- You cannot transfer the bonds.
If you cash (redeem) the bonds before the year in which you
reach age 59 1/2, you may be subject to a 10% additional
tax. See Early Distributions, later. You can roll over
redemption proceeds into IRAs.
Employer and Employee
Association Trust Accounts
Your employer, labor union, or other employee association can set
up a trust to provide individual retirement accounts for its employees
or members. The requirements for individual retirement accounts apply
to these employer or union-established traditional IRAs.
Simplified Employee Pension (SEP)
A simplified employee pension (SEP) is a written arrangement that
allows your employer to make deductible contributions to a traditional
IRA (a SEP-IRA) set up for you to receive such contributions. See
chapter 4
for more information.
Required Disclosures
The trustee or issuer (sometimes called the sponsor) of your
traditional IRA generally must give you a disclosure statement at
least 7 days before you set up your IRA. However, the sponsor does not
have to give you the statement until the date you set up (or purchase,
if earlier) your IRA, provided you are given at least 7 days from that
date to revoke the IRA.
If you revoke your IRA within the revocation period, the sponsor
must return to you the entire amount you paid. The sponsor must report
on the appropriate IRS forms both your contribution to the IRA (unless
by a trustee-to-trustee transfer) and the distribution to you upon
your revocation of the IRA. These requirements apply to all sponsors.
Generally, the sponsor is the bank that is the trustee of the
account or the insurance company that issued the annuity contract.
Disclosure statement.
The disclosure statement given to you by the plan sponsor must
explain certain items in plain language. For example, the statement
should explain when and how you can revoke the IRA, and include the
name, address, and telephone number of the person to receive the
notice of cancellation. This explanation must appear at the beginning
of the disclosure statement.
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