IRA Rules

For The Traditional IRA

The traditional IRA is the most common form of IRA which can be set up and contributed to by anyone who works for compensation or is the spouse of someone who works for compensation and files joint tax returns with that spouse. The only restriction is that you must not reach the age of 70 1/2 by the end of the calendar year in which you want to make the contribution.

You can set up an IRA whether or not you are covered under a separate retirement plan, however depending upon your income it may affect the deductibility of your contribution. See IRA Deduction Rules for additional details.

If you and your spouse are both covered by other retirement plans you can both set up separate IRA accounts, you may not contribute to the same IRA. Even a non-working spouse can have a separate IRA as long as they are filing a joint tax return.

Where To Set Up Your IRA

You can set up an IRA at your bank or financial institution, through most mutual fund companies, stock brokers or even life insurance companies. The financial institution may also act as the trustee or custodian or there may be a 3rd party custodian. The institution must be approved by the IRS to act as a trustee or custodian.

Traditional IRA Contribution Rules

You can make IRA contributions until you reach the age of 70 1/2 in the calendar year in which the contribution is made. For example, if you were born before June 30, 1940 you may not make an IRA contribution for the 2010 tax year.

Contributions can be made for a tax year up until your tax due date the following year, not including extensions. For most people this means they can make contributions for the 2010 tax year until April 15, 2011.

IRA contributions are generally limited to cash contributions up to the deductible amount except for in the case of IRA roll overs or employer contributions to a Simplified Employee Pension (SEP) Account.

The contribution you make can be split between a Traditional and Roth IRA if you wish, but the combined contribution can not exceed the following limits.

The 2010 - 2011 IRA Contribution Limits

If you are under 50 years old at the end of the contribution year, your maximum annual deductible contribution is limited to $5000 or the amount of compensation you earned, whichever is smaller.

If you are 50+ years old at the end of the contribution year, your maximum annual deductible contribution is limited to $6000 or the amount of compensation you earned whichever is smaller.

Spousal IRA - If a spouse makes less than the primary earner they may also contribute to a separate IRA account following the same guidelines. For example, if Betty is a stay at home mom and is married to Bill who earns $50,000 and Bill who is 53 contributes $6000 to his IRA then Betty bases her contribution limit on an income of $50,000 - $6000 or $44,000. So if she is 50 or over she could contribute $6000 or $5000 is she was under 50 years old.

In all cases, deductibility is subject to the following Modified Adjusted Gross Income (AGI) limits for 2010.

If you have a retirment plan at work you may be subject to these phase out rules:

If you are NOT covered by a retirement plan at work then the following Modified AGI Rules Apply:

Last updated by IRS on December 3, 2009

IRA Early Withdrawal Rules

The earliest age that you can withdraw IRA funds without an early withdrawal penalty is 59 1/2. If funds are drawn prior to that time you will have to pay a 10% penalty in addition to your normal tax rate.

IRA Withdrawal Penalty Exceptions

There are some exemptions that are not penalized however as long as money is withdrawn that has been in the account for at least 5 tax years.

1. If the owner of the IRA becomes permanently paralyzed they can access IRA funds without penalty.

2. If they have non-reimbursed medical expenses of more than 7.5% of their adjusted gross income.

3. If the owner dies before age 59 1/2 the estate will not have to pay any penalties.

4. A first time home buyer can withdraw up to $10,000 for the purchase of a home.

5. Certain higher education costs may be paid penalty free but the money would still be taxable income.

6. If you are unemployed longer than 12 weeks you can use IRA funds to pay for medical insurance coverage.

7. If the IRS places a Tax Lein on your IRA the funds used will be penalty free.

IRA Mandatory Withdrawal Rules

In addition to Early Withdrawal rules the IRS also imposes mandatory withdrawal rules for all IRAs. Once the account owner reaches age 70 1/2 they must take the minimum distribution in that year plus each year after. The required minimum is based on a couple factors including the amount of money available in the account at the end of the year as well as the distribution period or life expectancy. You can learn more about this by reading IRS publication 590 or consulting a tax professional.

IRA Contribution Rules
2010 - 2011 IRA Contribution Limits
IRA Deduction Limits - Modified AGI Rules
IRA Withdrawal Rules
IRA Withdrawal Penalty Exceptions
IRA Mandatory Withdrawal Rules

Health Savings Account Rules