8.1 Starting a Traditional IRA

If you have earnings, you may contribute to a traditional IRA up to an annual limit (8.2). The contribution may be deductible (8.4) or nondeductible (8.6). Earnings within the IRA accumulate tax free until withdrawals are made (8.8).

You also may set up a traditional IRA by rolling over a distribution received from a qualified employer plan. For example, if you receive a lump-sum payment from a qualified employer plan upon retirement, changing jobs, or becoming totally disabled, you may make a tax-free rollover to a traditional IRA (7.8). If you have a traditional IRA, you can roll it over or make a direct transfer to a different traditional IRA (8.10).

Your employer can set up a “deemed IRA” as a separate account under a qualified retirement plan. As long as the separate account otherwise meets IRA requirements, you can make voluntary employee contributions that will be treated as IRA contributions subject to the regular IRA rules. The separate account can be treated as a traditional IRA or Roth IRA (8.19).

Roth IRAs.

Annual contributions to a Roth IRA and conversions of traditional IRAs to Roth IRAs are discussed at 8.19–8.21.

Restrictions on traditional IRAs.

You may not freely withdraw IRA funds until the date you reach age 59½ or become disabled. If you take money out before that time, you are subject to a penalty (8.12). Pledging the account as collateral is treated as a taxable distribution from the account (8.8). In the year you reach age 70½, you may no longer make traditional IRA contributions, and you must start to withdraw (8.13) from the account. All IRA withdrawals are fully taxable except for amounts allocable to nondeductible contributions (8.8 − 8.9). Special averaging for lump-sum distributions (7.4) does not apply to IRA distributions. Excess contributions (8.7) are penalized.

If your IRA loses value because of poor investments, you may not deduct the loss. A loss is allowed only if you make nondeductible contributions that you have not recovered when the account is depleted (8.9).

Filing Tip

IRA Fees and Brokerage Commissions

Fees paid to set up or manage an IRA, and annual account maintenance fees, are not considered IRA contributions provided they are separately billed. They are investment expenses that may be deducted as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor (19.1). However, broker’s commissions that are paid when you make investments for your IRA are not separately deductible, according to the IRS. They are considered IRA contributions subject to the $5,000 contribution limit ($6,000 if age 50 or older) for 2012.

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Types of traditional IRAs.

You may set up an IRA as:

You may set up one type of IRA one year and choose another form the next year. You also may split your contribution between two or more investment vehicles. For example, you are eligible to contribute $5,000 for 2012 if under age 50. You may choose to put $2,500 into an individual retirement annuity and $2,500 into an individual retirement account with a bank, mutual fund, or brokerage firm.

You do not have to file any forms with your tax return when you set up or make contributions to a deductible IRA. Form 8606 must be attached to Form 1040 or Form 1040A if you make nondeductible IRA contributions (8.6). The trustee or issuer of your IRA will report your contribution to the IRS on Form 5498, and you should receive a copy.

Self-directed IRA.

If you wish to take a more active role in managing your IRA investments, you may set up a “self-directed” IRA using an IRS model form. The model trust (Form 5305) and the model custodial account agreement (Form 5305-A) meet the requirements of an exempt individual retirement account and so do not require a ruling or determination letter approving the exemption of the account and the deductibility of contributions made to the account. If you use this method, you still have to find a bank or other institution or trustee to handle your account or investment. Investments in a self-directed IRA are subject to restrictions; see the Caution in 8.1.

Caution

Restrictions on Collectibles Investments

If you have a self-directed traditional IRA and you invest in collectibles, such as art works, gems, stamps, antiques, rugs, metals, guns, or certain coins, you will have to pay a tax on your investment. The investment is treated as a taxable distribution to you in the year you make it. Coins are treated as collectibles, except for state-issued coins or certain U.S. minted gold, silver, and platinum coins. There is also an exception for gold, silver, platinum, or palladium bullion held by the IRA trustee, provided the fineness of the metal meets commodity market standards. If bullion is stored with a company other than the IRA trustee, the investment is subject to the deemed distribution rule for collectibles.

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SIMPLE IRA.

If you work for a company with 100 or fewer workers, your employer may set up a SIMPLE IRA to which you may make salary-reduction contributions (8.17).

Contributions allowed up until filing due date.

You have until April 15, 2013 (the regular filing due date for your 2012 return) to make deductible or nondeductible IRA contributions for 2012. You must make your contribution by April 15, 2013, even if you get an extension to file your 2012 return. If you are short of cash, you may borrow the funds to make the contribution without jeopardizing a deduction (8.2). If an IRA deduction entitles you to a refund, you can file your return early, claim the IRA deduction, and if you receive the refund in time, apply it towards an IRA contribution before the due date.