An individual retirement arrangement, or IRA, is a personal savings plan allowing you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you.

To contribute to an IRA, you must be under age 70½ at the end of the tax year and have taxable compensation, such as wages, salaries, commissions, tips, bonuses, and net income from self-employment involving significant services provided. In addition, taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes.

Compensation usually does not include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation.

The most you can contribute to your IRA for any year is the smaller of $2,000 or your taxable compensation for the year. If neither you nor your spouse are covered by a retirement plan, your contributions up to your limit, will be fully deductible. If you are not covered by a retirement plan but your spouse is, you are considered covered by a plan unless you and your spouse live apart the entire year and file separate returns.

If you are covered or considered covered by a retirement plan, your IRA deduction may be reduced or eliminated, depending on the amount of your income and your filing status. If you file Form 1040A or Form 1040, figure your deduction using the worksheets in the instructions or in Publication 590, Individual Retirement Arrangements (IRAs). You cannot claim an IRA deduction on Form 1040EZ. Form 8606 should be attached to your return if any of your IRA contributions are not deductible.

If both you and your spouse work, or otherwise qualify, each of you may contribute to separate IRAs.

If your spouse has no taxable compensation, you can contribute to a separate spousal IRA on their behalf, if you file a joint return and your spouse is under age 70½ at the end of the year.

If your spouse has a small amount of compensation; generally less than $250, then that spouse may choose to be treated as having no compensation for purposes of IRA contribution and deduction limits, and likewise use the rules for spousal IRAs. Your total contribution to both your IRA and the spousal IRA is limited to the smaller of $2,250 or your taxable compensation. You cannot contribute more than $2,000 to either IRA for the year.

The deadline for making a contribution to an IRA for the year is the due date of your return, not including any extensions of time to file.

You may choose to take the deduction on a return filed before the contribution is actually made, provided you make the contribution by the due date of that return, not including extensions.

Amounts you withdraw from your IRA, are fully or partially taxable in the year you withdraw them. If you made only deductible contributions, withdrawals are fully taxable.

If you made any non-deductible contributions, withdrawals are partially taxable. Use Form 8606 to figure the taxable portion of withdrawals.

Amounts you withdraw before you reach age 59½ may be subject to a 10% additional tax. You also may owe an additional tax if you do not begin to withdraw minimum distribution amounts by April 1 of the year after you reach age 70½. These additional taxes are figured and reported on Form 5329, Additional Taxes Attributable to Qualified Retirement Plans (Including IRAs), Annuities, and Modified Endowment Contracts. See the form instructions for exceptions to the additional tax.

More information on IRAs, including information on tax-free transfers and rollovers, is available in Publication 590, Individual Retirement Arrangements (IRAs).

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