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Frequently Asked Tax Questions And Answers
Keyword: Traditional IRA
5.1 Pensions and Annuities: General
Am I considered covered by an employer sponsored retirement plan
for the year if I do not participate in the plan or if I did not work long
enough to be vested?
The answer to this question depends on your type of retirement plan. If
your employer's plan has a separate account for each employee. This is called
a defined contribution plan if any amount was contributed or allocated by
you or your employer to your account, you are considered covered. It does
not matter if you have worked long enough to be vested.
In the other type of plan, the plan employer must make enough contributions
(together with earnings) to provide the retirement benefit promised in the
retirement plan. This is called a defined benefit plan. In this type of plan,
if you meet the minimum age and years of service requirements to participate
in your employer's plan, you are considered covered even if you decline coverage.
It does not matter if you are vested.
The Form W-2 you receive from your employer has a box used to indicate
whether you were covered for the year. The "Pension Plan" box should have
a mark in it if you were covered.
References:
17.1 Individual Retirement Arrangements (IRAs): Distributions, Early Withdrawals, 10% Additional Tax
How do I calculate minimum the amount that must be withdrawn from my IRA
after age 70 1/2?
You will need to get Publication 590, Individual Retirement Arrangements
(IRAs) to find out this amount. Generally the minimum distribution is computed
using one of three tables found in Publication 590. Table I is used by beneficiaries.
Table II is for use by owners who have spouses who are more than 10 years younger.
Table III is generally for use by unmarried owners and owners who have spouses who
are not more than 10 years younger.
References:
If we cash in an IRA account while in our thirties, what forms do we need
to fill out?
You will need to file a Form 1040 and show the amount of withdrawal from your IRA.
Since you took the withdrawal before reaching age 59 1/2, unless you meet certain
exceptions listed in Publication 590, Individual Retirement Arrangements (IRAs),
you will need to pay an additional 10 percent tax on early distributions from qualified
retirement plans that is reported on line 57 of Form 1040. You may need to complete Form 5329 (PDF), Additional Taxes on Qualified Plans (including
IRAs) and Other Tax-Favored Accounts, and attach it to the tax return, if required.
If you ever made nondeductible contributions to your IRA, you must complete Form 8606 (PDF), Nondeductible IRAs and Coverdell ESA's attach
it to your return. Form 8606 is used to determine if the total amount of your distribution
is tax free.
References:
- Publication 590, Individual Retirement Arrangements (IRAs)
- Form 5329 (PDF), Additional Taxes On
Qualified Plans (Including IRAs), and Other Tax-Favored Accounts
-
Instructions for Form 5329, Additional Taxes On
Qualified Plans (Including IRAs), and Other Tax-Favored Accounts
- Tax Topic 451, Individual Retirement Arrangements (IRAs)
- Tax Topic 557, Tax on Early Distributions from Traditional
and Roth IRA's.
- Form 8606 (PDF), Nondeductible IRSs
and Coverdell ESA's
If we cash in an IRA account while in our thirties, when do we pay the taxes
and penalties?
Because our tax system is a pay-as-you-go system, you may need to make an estimated
tax payment by the due date for the quarter in which you received the distribution.
When calculating your tax liability to determine whether you need to make an estimated
tax payment, your total tax for the year should include the amount of the additional
10 percent tax on early distributions from qualified retirement plans unless any exception
applies.
You would calculate the tax on Form 1040-ES (PDF), Estimated
Tax for Individuals, and any 10 percent additional tax on early distributions
from qualified retirement plans on Form 5329 (PDF), Additional
Taxes On Qualified Plans (Including IRA's) and Other Tax-Favored Accounts. Any
10 percent additional tax would go on Form 1040ES line 12 "other taxes," when completing
the worksheet.
References:
- Form 1040-ES (PDF), Estimated Tax for
Individuals
- Form 5329 (PDF), Additional Taxes On
Qualified Plans (Including IRA's) and Other Tax-Favored Accounts
- Publication 505, Tax Withholding and Estimated Tax
- Tax Topic 451, Individual Retirement Arrangements (IRAs)
- Tax Topic 557, Tax on Early Distribution from Traditional
and Roth IRA's.
Can the 10% penalty for an early withdrawal from an IRA be deducted in the
Adjusted Gross Income section of Form 1040 as a penalty on early withdrawal of savings?
No, the additional 10 percent tax on early distributions from qualified retirement
plans you pay for a premature withdrawal of an IRA does not qualify as a penalty for
withdrawal of a savings account.
References:
17.4 Individual Retirement Arrangements (IRAs): Traditional IRA
I want to establish a traditional individual retirement arrangement (IRA)
for my spouse, and I need additional information. What is the most I can contribute
to a spousal IRA during the tax year?
If both you and your spouse work and both have taxable compensation, each of you
can contribute up to $3,000 (or the amount of each IRA owner's compensation, if less)
to a separate traditional IRA. Even if one spouse has little or no compensation, up
to $3,000 can be contributed to each IRA if combined compensation is at least equal
to the amount contributed to both IRAs and you file a joint return. You can contribute
$3,000 to a separate IRA for your nonworking spouse if you file a joint return. Your
total contribution to both your IRA and the spousal IRA for this year is limited to
the smaller of $6,000, or your taxable compensation reduced by any contributions you
make to a traditional IRA or Roth IRA. You cannot contribute more than $3,000 to
either IRA for the year. If you are 50 or older in 2003, the most that can be contributed
to your traditional IRA for 2003 is the lesser of:
. $3,500 (up from $2,000), or
. Your compensation that you must include in income.
For additional information, refer to Tax Topic 451, Individual Retirement
Arrangements (IRAs), or Publication 590, Individual Retirement Arrangements
(IRAs) .
References:
Can I take an IRA deduction for the amount I contributed to a 401(k) plan
last year?
No. A 401(k) plan is not an IRA. However, the amount you contributed is not included
as income in box 1 of your W-2 form so you don't pay tax on it for 2003. For more
information, refer to Tax Topic 424, 401(k) Plans, Publication 575, Pension
and Annuity Income, or Publication 560, Retirement Plans for Small Business.
References:
If I am covered by a employer sponsored retirement plan for part of the
year, but work the rest of the year for an employer without a retirement plan, how
much of my earnings may I deduct for a traditional IRA?
The amount you can deduct will be determined by your modified Adjusted Gross Income
(AGI) and filing status. For specific information refer to Publication 590, Individual
Retirement Accounts (IRAs).
References:
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