Individual Retirement Arrangements (IRAs)
An individual retirement arrangement (IRA) is a tax-favored personal savings arrangement, which allows you to set aside money for retirement. There are several different types of IRAs, including traditional IRAs and Roth IRAs. You can set up an IRA with a bank, insurance company, or other financial institution.
You may be able to deduct some or all of your contributions to a traditional IRA. You may also be eligible for a tax credit equal to a percentage of your contribution. Amounts in your traditional IRA, including earnings, generally are not taxed until distributed to you. IRAs cannot be owned jointly. However, any amounts remaining in your IRA upon your death will be paid to your beneficiary or beneficiaries.
To contribute to a traditional IRA, you must be under age 70½ at the end of the tax year. You, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes. Compensation 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.
Distributions from a traditional IRA are fully or partially taxable in the year of distribution. If you made only deductible contributions, distributions are fully taxable. Distributions made prior to age 59½ may be subject to an additional 10% tax. You may also owe an excise tax if you do not begin to withdraw minimum distributions by April 1 of the year after you reach age 70½.
A Roth IRA differs from a traditional IRA in several respects. Contributions to a Roth IRA are not deductible (and you do not report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions are not subject to tax. In addition, you do not have to be under age 70½ to contribute to a Roth IRA. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up.