Important Reminders

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

Form 8606. If you make nondeductible contributions to a traditional IRA and you do not file Form 8606, Nondeductible IRAs, with your tax return, you may have to pay a $50 penalty.

Spousal IRAs. In the case of a married couple filing a joint return, up to $3,000, ($3,500 if 50 or older) can be contributed to IRAs (other than SIMPLE IRAs) on behalf of each spouse, even if one spouse has little or no compensation. For more information, see Spousal IRA Limit under How Much Can Be Contributed? in chapter 1.

Spouse covered by employer plan. If you are not covered by an employer retirement plan and you file a joint return, you may be able to deduct all of your contributions to a traditional IRA even if your spouse is covered by a plan. For more information, see How Much Can I Deduct? in chapter 1.

Distributions for higher education expenses. You can take distributions from your traditional or Roth IRA for qualified higher education expenses without having to pay the 10% additional tax on early distributions. For more information, see Higher education expenses under Age 59 1/2 Rule in chapter 1, Traditional IRAs, and Additional Tax on Early Distributions in chapter 2, Roth IRAs.

Distributions for first home. You can take distributions of up to $10,000 from your traditional or Roth IRA to buy, build, or rebuild a first home without having to pay the 10% additional tax on early distributions. For more information, see First home under Age 59 1/2 Rule in chapter 1, Traditional IRAs, and Additional Tax on Early Distributions in chapter 2, Roth IRAs.

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. Roth IRAs are discussed in chapter 2.

Losses taken into account in calculating net income. A method for calculating net income associated with returned contributions and recharacterized contributions allows net income to be a negative amount. If no deduction is claimed for a contribution, there is no penalty if you withdraw the contribution or if you recharacterize it and withdraw or transfer (in the case of a recharacterization) any net income earned on the contribution by the due date of your return (including extensions) for the year.

The calculation method allows you to take into account any loss on a returned or recharacterized contribution while it was in the IRA when calculating the amount of net income that must be withdrawn or recharacterized. If there was a loss in either case, net income may be a negative amount. See Excess Contributions Withdrawn by Due Date of Return in chapter 1 and Recharacterizations in chapter 2.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication discusses individual retirement arrangements (IRAs). An IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement.

What are some tax advantages of an IRA? Two tax advantages of an IRA are that:

1. Contributions you make to an IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances, and
2. Generally, amounts in your IRA (including earnings and gains) are not taxed until distributed. In some cases, amounts are not taxed at all if distributed according to the rules.

What's in this publication? This publication explains the rules for:

• Setting up an IRA,
• Contributing to an IRA,
• Transferring money or property to and from an IRA,
• Handling an inherited IRA,
• Making withdrawals from an IRA,
• Receiving distributions from an IRA, and
• Taking a credit for contributions to an IRA.

It also explains the penalties and additional taxes that apply when the rules are not followed. To assist you in complying with the tax rules for IRAs, this publication contains worksheets, sample forms, and tables, which can be found throughout the publication and in the appendices at the back of the publication.

How to use this publication. The rules that you must follow depend on which type of IRA you have. Use Table I-1 to help you determine which parts of this publication to read. Also use Table I-1 if you were referred to this publication from instructions to a form.

Table I-1. Using This Publication

IF you need information on ...	THEN see ...
traditional IRAs	chapter 1.
Roth IRAs	chapter 2, and  parts of  chapter 1.
SEP-IRAs	chapter 3.
SIMPLE IRAs	chapter 4.
credit for qualified retirement savings contributions	chapter 5.
summary record of traditional IRA(s) for 2002	appendix A.
worksheets for social security recipients who contribute to a traditional IRA	appendix B.
Coverdell education savings accounts (formerly called education IRAs)	Publication 970.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at
www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items

You may want to see:

Publications

• 560 Retirement Plans for Small Business (Including SEP, SIMPLE, and Qualified Plans)
• 571 Tax-Sheltered Annuity Plans (403(b) Plans)
• 575 Pension and Annuity Income
• 939 General Rule for Pensions and Annuities

Forms (and instructions)

• W-4P Withholding Certificate for Pension or Annuity Payments
• 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
• 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)-Not for Use With a Designated Financial Institution
• 5305-SEP Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement
• 5305A-SEP Salary Reduction Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement
• 5305-S SIMPLE Individual Retirement Trust Account
• 5305-SA SIMPLE Individual Retirement Custodial Account
• 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)-for Use With a Designated Financial Institution
• 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
• 5498 IRA and Coverdell ESA Contribution Information
• 8606 Nondeductible IRAs
• 8815 Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 (For Filers With Qualified Higher Education Expenses)
• 8839 Qualified Adoption Expenses
• 8880 Credit for Qualified Retirement Savings Contributions

See chapter 6 for information about getting these publications and forms.

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