Individual Retirement Arrangement (IRA)
Contributions & Deductions

This section explains the tax treatment of amounts you pay into traditional IRAs. A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. For more detailed information, get Publication 590.

Contributions. An IRA is a personal savings plan that offers you tax advantages to set aside money for your retirement. Two advantages of a traditional IRA are:

• You may be able to deduct some or all of your contributions to it, depending on your circumstances, and
• Generally, amounts in your IRA, including earnings and gains, are not taxed until distributed.

Although interest earned from your traditional IRA is generally not taxed in the year earned, it is not tax-exempt interest. Do not report this interest on your tax return as tax-exempt interest.

General limit. The most that can be contributed for any year to your traditional IRA is the lesser of the following amounts.

1. Your compensation that you must include in income for the year, or
2. $2,000.

Starting in 2002, the limit in (2) above increases to $3,000 ($3,500 if you will be age 50 or more by the end of 2002).

Contributions to spousal IRAs. In the case of a married couple filing a joint return, up to $2,000 can be contributed to IRAs (other than SIMPLE or education IRAs) on behalf of each spouse, even if one spouse has little or no compensation.

Starting in 2002, the $2,000 limit is increased to $3,000 ($3,500 for each spouse age 50 or more by the end of 2002).

For more information on the general limit and the spousal IRA limit, see How Much Can Be Contributed? in Publication 590.

Deductible contribution. Generally, you can deduct the lesser of the contributions to your traditional IRA for the year or the general limit (or spousal IRA limit, if applicable) for your IRA. However, if you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. Your deduction may be reduced or eliminated, depending on your filing status and the amount of your income.

Nondeductible contribution. The difference between your total permitted contributions and your total deductible contributions, if any, is your nondeductible contribution. You must file Form 8606, Nondeductible IRAs and Coverdell ESAs, to report nondeductible contributions even if you do not have to file a tax return for the year.

Roth IRA. Regardless of your age, you may be able to establish and contribute to a Roth IRA. You cannot claim a deduction for any contributions to a Roth IRA. But, if you satisfy the requirements, all earnings are tax free and neither your nondeductible contributions nor any earnings on them are taxable when you withdraw them.

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