Frequently Asked Questions About IRAs

Am I eligible to have an IRA?

If you are under age 70 ½ for the entire tax year and have earned compensation, you are eligible to establish an IRA, even if you already participate in any type of government plan, tax-sheltered annuity, simplified employee pension (SEP) plan, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), or qualified plan (pension or profit sharing) established by an employer.

 

What is compensation?

Compensation is the salary or wages you receive as an employee. If you are self-employed, compensation is your net income for personal services performed for the business. All taxable alimony is considered compensation. Interest, dividends, and most rental income is passive income and is not considered compensation.

 

How much can I contribute to my IRA?

You may contribute any amount up to the lesser of 100% of your compensation or the maximum contribution limit for the tax year. This amount is aggregated between a traditional IRA and a Roth IRA. The following chart shows the contribution limits:

Tax Year Standard Limit
(If Not Age 50 or Over)
Catch Up Contribution
(Age 50 or Over)
Total Contribution
(Age 50 or over)

2012

2013

$5,000.00

$5,500.00

$1,000.00

$1,000.00

$6,000.00

$6,500.00

 

 

Do I pay taxes on the earnings of my IRA?

All earnings on your IRA contributions (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the IRA account.

 

Do I get a tax deduction for my contribution?

Depending on your marital status, your (or your spouse’s) participation in an employer- maintained retirement plan, your tax filing status and your modified adjusted gross income (MAGI), you may be eligible for the full deduction, a partial deduction, or no deduction. Please consult your tax advisor for your specific situation.

 

What if I'm not eligible for a deductible IRA contribution?

You can still make nondeductible contributions to your IRA. You also may be eligible for a Roth IRA.

 

Can I withdraw funds from my IRA without incurring any penalties?

You can withdraw funds from your IRA any time after you reach age 59 ½ without the 10 percent IRS premature distribution penalty. You can also avoid the premature distribution penalty before age 59 ½ if you become disabled or die, if the distributions are part of certain periodic payments, if your medical expenses exceed 7.5 percent of your adjusted gross income, or if distributions pay for: health care insurance once you have been receiving unemployment compensation for at least 12 weeks, qualified higher education expenses, or a first time home purchase up to $10,000. When you reach age 70 ½, you must begin to take your minimum required distributions or severe penalties will be imposed.

 

How are the funds taxed at distribution?

If you are over age 59 ½, simply include the taxable portion of the amount withdrawn (generally, deductible contributions and all earnings) as income. However, if you are under the age of 59 ½ and do not meet one of the exceptions, you must also pay a 10 percent IRS penalty for premature distribution. The nondeductible portion of the distribution is not taxable when withdrawn nor is it subject to the 10 percent premature distribution penalty, as long as the account holder has maintained proper records on IRS Form 8606.

 

What are the spousal IRA rules?

The spousal IRA rules allow a married person to contribute the maximum amount for his/her spouse. For 2011, a couple can contribute up to 100 percent of their combined earned income or $10,000 (or $12,000 if both are age 50 or over), whichever is less. The amounts can be divided in any manner between the two IRAs as long as no more than $5,000 (or $6,000 if both are age 50 or over) is contributed to either IRA. These amounts will increase each year as shown previously.

 

When is the contribution deadline for funding an IRA?

IRAs for the taxable year can be opened and funded any time between January 1 and the date your tax return is due for the year, excluding extensions. This due date is normally April 15th of the following year.

 

How do I open an IRA?

Stop by one of our branch offices and speak with one of our personal bankers. We will explain the nature of these accounts in more detail and help you complete the simple forms necessary to establish your IRA.

 

The content of this article is for information purposes only and is not intended to provide legal, accounting or other professional advice and should not be relied upon as such. You are advised to seek the advice of your legal or tax professional.