Publication 590: Individual Retirement Arrangements (IRAs); Publication 590 Introductory Material

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Table of Contents

Important Changes for 2003

Simplified employee pension (SEP). SEP-IRAs are no longer covered in this publication. They are covered in Publication 560, Retirement Plans for Small Business.

Modified AGI limit for traditional IRAs increased. For 2003, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

More than $60,000 but less than $70,000 for a married couple filing a joint return or a qualifying widow(er),
More than $40,000 but less than $50,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

For all filing statuses other than married filing separately, the upper and lower limits of the phaseout range increased by $6,000. For more information, see How Much Can You Deduct? in chapter 1.

Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA. For this purpose, a “qualified employer plan” includes:

A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),
A qualified employee annuity plan (section 403(a) plan),
A tax-sheltered annuity plan (section 403(b) plan), and
A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.

Increase in limit on salary reduction contributions under a SIMPLE. For 2003, salary reduction contributions that your employer can make on your behalf under a SIMPLE plan are increased to $8,000 (up from $7,000 in 2002). For more information about salary reduction contributions, see How Much Can Be Contributed on Your Behalf? in chapter 3.

Additional salary reduction contributions to SIMPLE IRAs for persons 50 and older. For 2003, additional salary reduction contributions can be made to your SIMPLE IRA if:

You were 50 or older in 2003, and
No other salary reduction contributions can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit.

For 2003, the additional amount is the lesser of the following two amounts.

$1,000 (up from $500 for 2002), or
Your compensation for the year reduced by your other elective deferrals for the year.

For more information, see How Much Can Be Contributed on Your Behalf? in chapter 3.

Important Changes for 2004

Modified AGI limit for traditional IRA contributions increased. For 2004, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (AGI) is:

For all filing statuses other than married filing separately, the upper and lower limits of the phaseout range will increase by $5,000. See How Much Can You Deduct? in chapter 1.

Increase in limit on salary reduction contributions under a SIMPLE. For 2004, salary reduction contributions that your employer can make on your behalf under a SIMPLE plan are increased to $9,000 (up from $8,000 in 2003). For more information about salary reduction contributions, see How Much Can Be Contributed on Your Behalf? in chapter 3.

Additional salary reduction contributions to SIMPLE IRAs for persons 50 and older. For 2004, additional salary reduction contributions can be made to your SIMPLE IRA if:

For more information, see How Much Can Be Contributed on Your Behalf? in chapter 3.

New method for figuring net income on returned or recharacterized IRA contributions. There is a new method for figuring the net income on IRA contributions made after 2003 that are returned to you or recharacterized. For more information, see How Do You Recharacterize a Contribution? or Contributions Returned Before Due Date of Return in chapter 1. For figuring the net income on IRA contributions made during 2002 and 2003 that were returned to you or recharacterized, you can use the method described in this publication, the method permitted by Notice 2000–39, or the method in the proposed regulations.

Important Reminders

Traditional IRA contribution and deduction limit. Unless you reached age 50 before 2004, the most that can be contributed to your traditional IRA for 2003 is the smaller of the following amounts:

If you reached age 50 before 2004, the most that can be contributed to your traditional IRA for 2003 is the smaller of the following amounts:

Credit for IRA contributions and salary reduction contributions. If you are an eligible individual, you may be able to claim a credit for a percentage of your qualified retirement savings contributions, such as contributions to your traditional or Roth IRA or salary reduction contributions to your SIMPLE. To be eligible, you must be at least 18 years old as of the end of the year, and you cannot be a student or an individual for whom someone else claims a personal exemption. Also, your adjusted gross income (AGI) must be below a certain amount. For more information, see chapter 4.

Rollovers of distributions from employer plans. You can roll over both the taxable and nontaxable part of a distribution from a qualified plan into a traditional IRA. If you have both deductible and nondeductible contributions in your IRA, you will have to keep track of your basis so you will be able to determine the taxable amount once distributions from the IRA begin. For more information, see Rollover From Employer's Plan Into an IRA under Can You Move Retirement Plan Assets? in chapter 1.

Kinds of rollovers from a traditional IRA. You can roll over, tax free, a distribution from your traditional IRA into a qualified plan, including a deferred compensation plan of a state or local government (section 457 plan), and a tax-sheltered annuity plan (section 403(b) plan). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers. For more information, see Rollovers under Can You Move Retirement Plan Assets? in chapter 1.

Rollovers of deferred compensation plans of state and local governments (section 457 plans) into traditional IRAs. If you participate in an eligible deferred compensation plan of a state or local government, you may be able to roll over part or all of your account tax free into an eligible retirement plan such as a traditional IRA. The most that you can roll over is the amount that qualifies as an eligible rollover distribution. The rollover may be either direct or indirect. For more information, see Rollovers in chapter 1.

Roth IRA contribution limit. If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2003 generally is the lesser of:

If you were 50 or older in 2003 and contributions on your behalf are made only to Roth IRAs, your contribution limit for 2003 generally is the lesser of:

However, if your modified AGI is above a certain amount, your contribution limit may be reduced. For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? in chapter 2.

Contributions to both traditional and Roth IRAs for same year. If contributions are made on your behalf to both a Roth IRA and a traditional IRA, your contribution limit for 2003 is the lesser of:

Rollovers from SIMPLE IRAs. You may be able to roll over tax free a distribution from your SIMPLE IRA to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). For more information, see When Can You Withdraw or Use Assets? in chapter 3.

Statement of required minimum distribution. If a minimum distribution is required from your IRA, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the required minimum distribution to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31 of the year in which the minimum distribution is required. It can be provided with the year-end fair market value statement that you normally get each year. No report is required for section 403(b) contracts (generally tax-sheltered annuities) or for IRAs of owners who have died.

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 You Deduct? in chapter 1.

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.

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's in this publication?

This publication discusses traditional, Roth, and SIMPLE IRAs. It 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,
Receiving distributions (making withdrawals) 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.
SIMPLE IRAs	chapter 3.
the credit for qualified retirement savings contributions	chapter 4.
how to keep a record of your contributions to, and distributions from, your traditional IRA(s)	appendix A.
SEP-IRAs and 401(k) plans	Publication 560.
Coverdell education savings accounts (formerly called education IRAs)	Publication 970.

IF for 2003, you received social security benefits, had taxable compensation, contributed to a traditional IRA, and you or your spouse was covered by an employer retirement plan, and you want to...	THEN see ...
first figure your modified adjusted gross income (AGI)	appendix B worksheet 1.
then figure how much of your traditional IRA contribution you can deduct	appendix B worksheet 2.
and finally figure how much of your social security is taxable	appendix B worksheet 3.

Comments and suggestions.

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

You can e-mail us at *[email protected]. Please put “Publications Comment” on the subject line.

You can write to us at the following address:

Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
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:

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–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 Contribution Information
8606
Nondeductible IRAs
8815
Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
8839
Qualified Adoption Expenses
8880
Credit for Qualified Retirement Savings Contributions

Table I-2. How Are a Traditional IRA and a Roth IRA Different?
This table shows the differences between traditional and Roth IRAs. Answers in the middle column apply to traditional IRAs. Answers in the right column apply to Roth IRAs.

Question	Answer
	Traditional IRA?	Roth IRA?
Is there an age limit on when I can set up and contribute to a	Yes. You must not have reached age 70½ by the end of the year. See Who Can Set Up a Traditional IRA? in chapter 1.	No. You can be any age. See Can You Contribute to a Roth IRA? in chapter 2.
If I earned more than $3,000 in 2003 ($3,500 if I was 50 or older by the end of 2003), is there a limit on how much I can contribute to a	Yes. For 2003, you can contribute to a traditional IRA up to: $3,000, or $3,500 if you were 50 or older by the end of 2003. There is no upper limit on how much you can earn and still contribute. See How Much Can Be Contributed? in chapter 1. Note. The $3,000 and $3,500 amounts do not increase for 2004.	Yes. For 2003, you may be able to contribute to a Roth IRA up to: $3,000, or $3,500 if you were 50 or older by the end of 2003, but the amount you can contribute may be less than that depending on your income, filing status, and if you contribute to another IRA. See How Much Can Be Contributed? and Table 2–1 in chapter 2. Note. The $3,000 and $3,500 amounts do not increase for 2004.
Can I deduct contributions to a	Yes. You may be able to deduct your contributions to a traditional IRA depending on your income, filing status, whether you are covered by a retirement plan at work, and whether you receive social security benefits. See How Much Can You Deduct? in chapter 1.	No. You can never deduct contributions to a Roth IRA. See What is a Roth IRA? in chapter 2.
Do I have to file a form just because I contribute to a	Not unless you make nondeductible contributions to your traditional IRA. In that case, you must file Form 8606. See Nondeductible Contributions in chapter 1.	No. You do not have to file a form if you contribute to a Roth IRA. See Introduction in chapter 2.
Do I have to start taking distributions when I reach a certain age from a	Yes. You must begin receiving required minimum distributions by April 1 of the year following the year you reach age 701/. See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1.	No. If you are the owner of a Roth IRA, you do not have to take distributions regardless of your age. See Are Distributions Taxable? in chapter 2.
How are distributions taxed from a	Distributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible contributions, not all of the distribution is taxable. See Are Distributions Taxable? in chapter 1.	Distributions from a Roth IRA are not taxed as long as you meet certain criteria. See Are Distributions Taxable? in chapter 2.
Do I have to file a form just because I receive distributions from a	Not unless you have ever made a nondeductible contribution to a traditional IRA. If you have, file Form 8606.	Yes. File Form 8606 if you received distributions from a Roth IRA (other than a rollover, recharacterization, certain qualified distributions, or a return of certain contributions).

Publication 590Introductory Material

Important Changes for 2003

Important Changes for 2004

Important Reminders

Note.

Note.

Note.

Introduction

Useful Items - You may want to see:

Publication 590
Introductory Material