Both spouses have compensation.   If both you and your spouse have compensation and are under age 70½, each of you can set up an IRA. You cannot both participate in the same IRA.

Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes the items discussed next.

Kinds of traditional IRAs.   Your traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account.

An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.

You can set up an individual retirement annuity by purchasing an annuity contract or an endowment contract from a life insurance company.

An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones who can receive the benefits or payments.

An individual retirement annuity must meet all the following requirements.

The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982. The bonds have the following features.

If you cash (redeem) the bonds before the year in which you reach age 59½, you may be subject to a 10% additional tax. See Age 59½ Rule under Early Distributions, later. You can roll over redemption proceeds into IRAs.

A simplified employee pension (SEP) is a written arrangement that allows your employer to make deductible contributions to a traditional IRA (a SEP IRA) set up for you to receive such contributions. Generally, distributions from SEP IRAs are subject to the withdrawal and tax rules that apply to traditional IRAs. See Publication 560 for more information about SEPs.

Your employer or your labor union or other employee association can set up a trust to provide individual retirement accounts for employees or members. The requirements for individual retirement accounts apply to these traditional IRAs.

The trustee or issuer (sometimes called the sponsor) of your traditional IRA generally must give you a disclosure statement at least 7 days before you set up your IRA. However, the sponsor does not have to give you the statement until the date you set up (or purchase, if earlier) your IRA, provided you are given at least 7 days from that date to revoke the IRA.

The disclosure statement must explain certain items in plain language. For example, the statement should explain when and how you can revoke the IRA, and include the name, address, and telephone number of the person to receive the notice of cancellation. This explanation must appear at the beginning of the disclosure statement.

If you revoke your IRA within the revocation period, the sponsor must return to you the entire amount you paid. The sponsor must report on the appropriate IRS forms both your contribution to the IRA (unless it was made by a trustee-to-trustee transfer) and the amount returned to you. These requirements apply to all sponsors.

Community property laws.   Except as discussed later under Spousal IRA Limit, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws.

Brokers' commissions.   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. For information about whether you can deduct brokers' commissions, see Brokers' commissions, later under How Much Can You Deduct.

Trustees' fees.   Trustees' administrative fees are not subject to the contribution limit. For information about whether you can deduct trustees' fees, see Trustees' fees, later under How Much Can You Deduct.

Qualified reservist repayments.   If you were a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions (defined later under Early Distributions) you received. You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or a similar arrangement.

Limit.   Your qualified reservist repayments cannot be more than your qualified reservist distributions, explained under Early Distributions, later.

When repayment contributions can be made.   You cannot make these repayment contributions after the later of the following 2 dates.

No deduction.   You cannot deduct qualified reservist repayments.

Reserve component.   The term “reserve component” means the:

Figuring your IRA deduction.   The repayment of qualified reservist distributions does not affect the amount you can deduct as an IRA contribution.

Reporting the repayment.   If you repay a qualified reservist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606, Nondeductible IRAs.

Example.   In 2007, your IRA contribution limit is $4,000. However, because of your filing status and AGI, the limit on the amount you can deduct is $3,500. You can make a nondeductible contribution of $500 ($4,000 - $3,500). In an earlier year you received a $3,000 qualified reservist distribution, which you would like to repay this year.

  For 2007, you can contribute a total of $7,000 to your IRA. This is made up of the maximum deductible contribution of $3,500; a nondeductible contribution of $500; and a $3,000 qualified reservist repayment. You contribute the maximum allowable for the year. Since you are making a nondeductible contribution ($500) and a qualified reservist repayment ($3,000) you must file Form 8606 with your return and include $3,500 ($500 + $3,000) on line 1 of Form 8606. The qualified reservist repayment is not deductible.

For 2007, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

This general limit may be increased to $7,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies later.

This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. (See Nondeductible Contributions, later.) Qualified reservist repayments do not affect this limit.

For 2007, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts:

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $8,000 ($9,000 if only one of you is age 50 or older or $10,000 if both of you are age 50 or older).

This limit may be increased to $7,000 for each spouse who participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies earlier.

Generally, except as discussed earlier under Spousal IRA Limit, your filing status has no effect on the amount of allowable contributions to your traditional IRA. However, if during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced or eliminated, depending on your filing status and income. See How Much Can You Deduct, later.

If contributions to your traditional IRA for a year were less than the limit, you cannot contribute more after the due date of your return for that year to make up the difference.

If contributions to your IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. However, a penalty or additional tax may apply. See Excess Contributions, later under What Acts Result in Penalties or Additional Taxes.

Contributions must be made by due date.   Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2007 must be made by April 15, 2008, and contributions for 2008 must be made by April 15, 2009.

Nontaxable combat pay.   If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you can contribute more for those years than you already have, you can make additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions will be treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:

Age 70½ rule.   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year.

  You attain age 70½ on the date that is six calendar months after the 70th anniversary of your birth. If you were born on June 30, 1937, the 70th anniversary of your birth is June 30, 2007, and you attained age 70½ on December 30, 2007. If you were born on July 1, 1937, the 70th anniversary of your birth was July 1, 2007, and you attained age 70½ on January 1, 2008.

Designating year for which contribution is made.   If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it).

Filing before a contribution is made.    You can file your return claiming a traditional IRA contribution before the contribution is actually made. Generally, the contribution must be made by the due date of your return, not including extensions.

Contributions not required.   You do not have to contribute to your traditional IRA for every tax year, even if you can.

Catch-up contributions.   If the requirements listed earlier at Catch-up contributions in certain employer bankruptcies under How Much Can Be Contributed? are met and you choose to make those catch-up contributions, you cannot use the higher contribution and deduction limits for individuals who are age 50 or older.

Trustees' fees.   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). For information about miscellaneous itemized deductions, see Publication 529, Miscellaneous Deductions.

Brokers' commissions.   These commissions are part of your IRA contribution and, as such, are deductible subject to the limits.

Full deduction.   If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of:

  This limit may be increased to $7,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies earlier.

  This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf.

Spousal IRA.   In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of:

  This limit may be increased to $7,000 if the spouse with the lower compensation participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies earlier.

  This limit is reduced by any contributions to a section 501(c)(18) plan on behalf of the spouse with the lesser compensation.

Covered by an employer retirement plan.   If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. This is discussed later under Limit if Covered by Employer Plan. Limits on the amount you can deduct do not affect the amount that can be contributed.

The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. The “Retirement Plan” box should be checked if you were covered.

Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered, later.

If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer.

As discussed earlier, the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and by your filing status. Your deduction may also be affected by social security benefits you received.

If you file Form 1040, enter your IRA deduction on line 32 of that form. If you file Form 1040A, enter your IRA deduction on line 17 of that form. If you file Form 1040NR, enter your IRA deduction on line 31 of that form. You cannot deduct IRA contributions on Form 1040EZ or Form 1040NR-EZ.

Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA of up to the general limit or, if it applies, the spousal IRA limit. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution.

Recordkeeping. There is a recordkeeping worksheet, Appendix A, Summary Record of Traditional IRA(s) for 2007, that you can use to keep a record of deductible and nondeductible IRA contributions.

The following examples illustrate the use of Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007.

Inherited from spouse.   If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:

Treating it as your own.   You will be considered to have chosen to treat the IRA as your own if: You will only be considered to have chosen to treat the IRA as your own if:

  However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. For more information, see When Must You Withdraw Assets? (Required Minimum Distributions), later.

Inherited from someone other than spouse.   If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

  Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

IRA with basis.   If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

Federal estate tax deduction.   A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. The beneficiary can deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year the income is reported. For information on claiming this deduction, see Estate Tax Deduction under Other Tax Information in Publication 559, Survivors, Executors, and Administrators.

  Any taxable part of a distribution that is not income in respect of a decedent is a payment the beneficiary must include in income. However, the beneficiary cannot take any estate tax deduction for this part.

  A surviving spouse can roll over the distribution to another traditional IRA and avoid including it in income for the year received.

More information.   For more information about rollovers, required distributions, and inherited IRAs, see:

Transfers to Roth IRAs.   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. For more information about these transfers, see Converting From Any Traditional IRA Into a Roth IRA, later, and Can You Move Amounts Into a Roth IRA? in chapter 2.

Transfers to Roth IRAs from other retirement plans.    For 2008, under certain conditions, you can move assets from an eligible retirement plan to a Roth IRA. For more information, see Can You Move Amounts Into a Roth IRA? in chapter 2.

A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers. This waiting period is discussed later under Rollover From One IRA Into Another.

For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option, later.

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.”

If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free. For information about transfers of interests in employer plans, see Distributions under divorce or similar proceedings (alternate payees) under Rollover From Employer's Plan Into an IRA, earlier.

If the transfer results in a change in the basis of the traditional IRA of either spouse, both spouses must file Form 8606 and follow the directions in the instructions for that form.

You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.

You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.

To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you recharacterize your contribution, you must do all three of the following.

If you made IRA contributions in 2007, you can withdraw them tax free by the due date of your return. If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this if, for each contribution you withdraw, both of the following conditions apply.

In most cases, the net income you must withdraw is determined by the IRA trustee or custodian. If you need to determine the applicable net income on IRA contributions made after 2007 that are returned to you, use Worksheet 1-4. See Regulations section 1.408-11 for more information.

Required minimum distribution.   The amount that must be distributed each year is referred to as the required minimum distribution.

Distributions not eligible for rollover.   Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment.

If you are the owner of a traditional IRA, you must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date.

Even if you begin receiving distributions before you reach age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date.

If you do not receive your required minimum distribution for 2007 until 2008, both your 2007 and your 2008 distributions will be includible on your 2008 return.

The rules for determining required minimum distributions for beneficiaries depend on whether the beneficiary is an individual. The rules for individuals are explained below. If the owner's beneficiary is not an individual (for example, if the beneficiary is the owner's estate), see Beneficiary not an individual, later.

There are three different tables. You use only one of them to determine your required minimum distribution for each traditional IRA. Determine which one to use as follows.

The age or ages to use with each table are explained below.

The following rules may apply to you.

Failed financial institutions.   Distributions from a traditional IRA are taxable in the year you receive them even if they are made without your consent by a state agency as receiver of an insolvent savings institution. This means you must include such distributions in your gross income unless you roll them over. For an exception to the 1-year waiting period rule for rollovers of certain distributions from failed financial institutions, see Exception under Rollover From One IRA Into Another, earlier.

Exceptions.   Exceptions to distributions from traditional IRAs being taxable in the year you receive them are:

Qualified charitable distributions.   A qualified charitable distribution (QCD) is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must have been at least age 70½ when the distribution was made. Also, you must have the same type of acknowledgement of your contribution that you would need to claim a deduction for a charitable contribution. See Records To Keep in Publication 526, Charitable Contributions. Your total QCDs for the year cannot be more than $100,000. If you file a joint return, your spouse can also have a QCD of up to $100,000. However, the amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

Example.   On November 1, 2007, Jeff, age 75, directed the trustee of his IRA to make a distribution of $25,000 directly to a qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions). The total value of Jeff's IRA is $30,000 and consists of $20,000 of deductible contributions and earnings and $10,000 of nondeductible contributions (basis). Since Jeff is at least age 70½ and the distribution is made directly by the trustee to a qualified organization, the part of the distribution that would otherwise be includible in Jeff's income ($20,000) is a qualified charitable distribution (QCD). In this case, Jeff has made a QCD of $20,000 (his deductible contributions and earnings). Because Jeff made a distribution of nondeductible contributions from his IRA, he must file Form 8606, Nondeductible IRAs, with his return. Jeff includes the total distribution ($25,000) on line 15a of Form 1040. He completes Form 8606 to determine the amount to enter on line 15b of Form 1040 and the remaining basis in his IRA. Jeff enters -0- on line 15b. He also enters “QCD” next to line 15b to indicate a qualified charitable distribution. After the distribution, his basis in his IRA is $5,000. If Jeff itemizes his deductions and files Schedule A with Form 1040, the $5,000 portion of the distribution attributable to the nondeductible contributions can be deducted as a charitable contribution, subject to AGI limits. He cannot take a charitable contribution deduction for the $20,000 portion of the distribution that was not included in his income.

  

You cannot claim a charitable contribution deduction for any QCD not included in your income.

Ordinary income.   Distributions from traditional IRAs that you include in income are taxed as ordinary income.

No special treatment.   In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified employer plans.

Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.

If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2007, you must use Form 8606 to figure how much of your 2007 IRA distribution is tax free.

The Form 8606 for Rose, illustrated, shows the information required when you need to use Worksheet 1-5 to figure your nontaxable distribution. Assume that the $500 entered on Form 8606, line 1, is the amount Rose figured using instructions 1 and 2 given earlier under Reporting your nontaxable distribution on Form 8606.

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any.

Your basis is the total amount of the nondeductible contributions in your traditional IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Two other special IRA distribution situations are discussed below.

If you receive a distribution from your traditional IRA, you will receive Form 1099-R, or a similar statement. IRA distributions are shown in boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA.

If code 1, 5, or 8 appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code 1 appears, see Early Distributions, later. If code 5 appears, see Prohibited Transactions, later. If code 8 appears, see Excess Contributions, later.

If code D, J, P, or S appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code D appears, see Excess Contributions, later. If code J appears, see Early Distributions, later. If code P appears, see Excess Contributions, later. If code S appears, see Additional Tax on Early Distributions in chapter 3.

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with a traditional IRA.

If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later.

Generally, an excess contribution is the amount contributed to your traditional IRAs for the year that is more than the smaller of:

This limit may be increased to $7,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies earlier.

The taxable compensation limit applies whether your contributions are deductible or nondeductible.

Contributions for the year you reach age 70½ and any later year are also excess contributions.

An excess contribution could be the result of your contribution, your spouse's contribution, your employer's contribution, or an improper rollover contribution. If your employer makes contributions on your behalf to a SEP IRA, see Publication 560.

You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later.

You cannot keep amounts in your traditional IRA indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 70½. The required minimum distribution for any year after the year in which you reach age 70½ must be made by December 31 of that later year.

Generally, you must use Form 5329 to report the tax on excess contributions, early distributions, and excess accumulations. If you must file Form 5329, you cannot use Form 1040A, Form 1040EZ, or Form 1040NR-EZ.