Traditional IRAs: Contributions

  1. Traditional IRAs: Introduction
  2. Traditional IRAs: Eligibility Requirements
  3. Traditional IRAs: Contributions
  4. Traditional IRAs: Distributions
  5. Traditional IRAs: Conclusion

A traditional IRA can have one or more  sources of funding. The options include:

  • regular IRA contributions
  • spousal IRA contributions
  • transfers
  • rollover contributions

Regular IRA Contributions

On an annual basis, an individual may contribute 100% of compensation up to $5,500. Individuals who are age 50 and older by the end of the year for which the contribution applies can make additional catch-up contributions of up to $1,000. For instance, an individual who is under age 50 on December 31, 2018 may contribute up to $5,500 for tax year 2018, but an individual who is age 50 or older by December 31, 2018 may contribute up to $6,500.

All regular IRA contributions must be made in cash (which includes checks). This means an IRA owner cannot make regular contributions in the form of securities.

Spousal IRA Contribution

An individual may make an IRA contribution on behalf of his or her spouse who makes little or no income. These are commonly referred to as spousal IRA contributions. Spousal IRA contributions are subjected to the same rules and limits as that of regular traditional IRA contributions. The spousal IRA contributions must be made to a separate IRA for the receiving spouse, as IRAs cannot be held as joint accounts. (For background reading, see Making Spousal IRA Contributions.)

For an individual to be eligible to establish a spousal IRA, he or she must meet the following requirements:

  • The couple must be married and file a joint tax return.
  • The individual making the spousal IRA contribution must have eligible compensation.
  • The total contribution for both spouses must not exceed the taxable compensation reported on their joint tax return.

Transfers

A transfer is a non-reportable, nontaxable movement of assets between similar types of retirement plans. An IRA owner may transfer assets between traditional IRAs, SEP IRAs and SIMPLE IRAs.

Generally, assets are transferred for the purpose of consolidating assets or changing financial institutions.

A transfer of IRA assets may also be made from one spouse's (or former spouse's) IRA to another, providing the transfer is permitted in accordance with a court-approved divorce decree or legal separation agreement.

There is no limit on the number of times an IRA holder may transfer assets between IRAs.

Assets cannot be transferred to or from a SIMPLE IRA until two years after the employer first made a contribution to the SIMPLE IRA. (For more insight, check out the SIMPLE IRAs Tutorial.)

Rollovers

An individual may make rollover contributions to his or her traditional IRA. A rollover occurs when an amount is distributed from a retirement account and deposited (rolled over) to the same or other retirement account.

A rollover is generally tax-free, but unlike a transfer, the transaction is reportable: The distribution is reported to the IRS and the IRA owner on IRS Form 1099-R; and the contribution on IRS Form 5498, if the rollover is made to an IRA.

An IRA owner may perform only one IRA-to-IRA rollover during a 12-month period.

A rollover contribution to an IRA could originate from the following:

  • A distribution from the same traditional IRA, another traditional IRA, a SEP IRA or a SIMPLE IRA that meets the two-year requirements: Rollover contributions must be made within 60 days after the IRA owner receives the distributed assets.
  • A direct rollover from a qualified plan, 403(b) plan or a governmental 457(b) plan and paid directly to the IRA: There is no time limit for depositing assets representing a direct rollover.
  • An indirect rollover, in which the assets are distributed from a qualified plan, 403(b) plan or a governmental 457(b) plan, and paid to the account owner, who then has 60-days to roll over the amount: In this case, the rollover must be completed within 60 days of receipt.

Deducting IRA Contributions

An individual may be able to get a tax deduction for his or her regular IRA contribution.The ability to deduct a traditional IRA contribution is determined by the following:

If allowed a deduction, the individual, depending on the above, will be permitted a full or partial deduction. We summarize how the above factors determine deductibility in the chart, below.

Active Participant Defined

Generally, active-participant status depends on whether the IRA owner also participates in an employer-sponsored retirement plan, which includes the following:

  • qualified plans, such as profit-sharing plans, defined-benefit plans, money-purchase pension plans, target-benefit plans and 401(k) plans
  • SEP IRAs
  • SIMPLE IRAs
  • 403(b) plans
  • qualified annuity plans
  • employee-funded pension trusts (created before June 25, 1959)
  • plans established for employees by the United States, a state or political subdivision of the United States, or an agency or instrumentality of the United States or any of its subdivisions

The rules that define an active participant vary among the different types of plans. For example, an individual is generally considered an active participant in a profit-sharing plan for the same year in which his or her employer deposits the contribution to the employer's profit-sharing account, even if the contribution is being made for a different year.* This is not the case for a money-purchase pension plan. With this type of plan, the individual is considered an active participant for the year for which the contribution is made, regardless of when it was deposited.

* Employers have until their tax-filing deadline plus extensions to make contributions; therefore, a contribution for 2017 may be made in 2018.

Usually, the employer will indicate, by checking the "Retirement Plan Box" on the individual's Form W-2, whether the individual is an active participant for the relevant year. Individuals should check with their employers to be sure.

The table below summarizes the deductibility limits for traditional IRA contributions made for tax year 2018. The limits for 2017 are slightly lower

Because the rules differ for each spouse when one is an active participant, use the table from the perspective of the individual for whom you are trying to determine deductibility. For instance, if an individual is not an active participant and files a joint tax return with a spouse who is an active participant, the individual may be able to deduct the entire amount contributed to his or her traditional IRA, but the spouse might not be able to deduct his or her own contribution. In this case, the ability to deduct each spouse's IRA contribution is determined by his or her MAGI.

 

Tax-Filing Status Active Participant Status Modified Adjusted Gross Income Deduction Allowed
Single or Head of Household

 

Individual is not active No Limit Full Deduction
Individual is active $63,000 or less Full Deduction
More than $63,000 but less than $73,000 Partial Deduction
$73,000 or more No Deduction
Married Filing Jointly

 

Individual is not active
Individual's spouse is not active
No Limit Full Deduction
Individual is active $101,000 or less Full Deduction
More than $101,000 but less than $121,000 Partial Deduction
$121,000 or more No Deduction
Individual is not active
Individual's spouse is active
$189,000 or less Full Deduction
More than $189,000 but less than $199,000 Partial Deduction
$199,000 or more No Deduction
Married Filing Separately

 

Individual is not active
Individual's spouse is not active
No Limit Full Deduction
Individual is active* $10,000 or less Partial Deduction
$10,000 or more No Deduction
Individual is not active
Individual's spouse is active**
$10,000 or less Partial Deduction
$10,000 or more No Deduction

 

Traditional IRA Deductibility Limits for 2018
* If the individual and his or her spouse did not live together at any time during the year, the individual is considered "single" for tax-filing purposes and should use the guidelines for a single taxpayer.
** If the individual and his or her spouse did not live together at any time during the year, the individual is allowed a full deduction.

 

Example: Spouses with Differing Participant Status

John is not an active participant, and he files a joint tax return with his spouse, Mary, who is an active participant. They are able to claim a full deduction for John's IRA contribution if their modified adjusted gross income is less than $189,000. However, they can claim a full deduction for Mary's IRA contribution only if their MAGI is $101,000 or less.

 

Figuring the Deductible Amount

Individuals whose incomes fall within the phase-out ranges can partially deduct contributions made to a traditional IRA. The following formula determines the amount of the contribution that is deductible:

(Highest Dollar Limit of MAGI Range - MAGI) X Contribution Limit/Highest dollar limit of phase-out range - Lowest dollar limit of phase-out range

 

Example: AGI Within the Phase-Out Range

Jack and Jill are married and file a joint tax return for 2018. Jack is an active participant, but Jill is not. Their modified adjusted gross income is $106,000, which falls into the $101,000-$121,000 phase-out range for Jack, so the highest and lowest dollar limits for this range are $101,000 and $121,000. Jack is under age 50 and is therefore able to contribute $5,500 to a traditional IRA. Using the formula above, Jack calculates his maximum deductible amount:
= ($115,000-$100,000) x [$5,500 / ($115,000 - $95,000)]
= $15,000 x ($5,500 / $20,000)
= $15,000 x 0.275
Answer =$4,125 ( rounded up to $4,130)
Note: Calculations are rounded up to the nearest $10. For instance, a calculation that results in $555 would be rounded up to $560.
Jack has the following options for the $4,130:

  • deduct the $4,130
  • treat it as a nondeductible contribution

If Jack treats the amount as a nondeductible contribution, he will not pay income tax on the amount when it is distributed from the IRA.

Tax-Filing Requirements 

Individuals who make nondeductible contributions to their traditional IRAs must file IRS Form 8606 for the year the nondeductible contribution is made. Failure to file Form 8606 may result in a $50 penalty being owed to the IRS and may cause all the contributions to be subject to taxes upon distribution (generally, a distribution of a nondeductible contribution is not subject to income tax).

Permissible Investments in IRAs 

One benefit of investing in an IRA is that the investment options are varied. The IRA owner's ability to choose the type of investment depends on the IRA product and the financial institution. Some IRAs may be limited to a preselected core group of investments or a specific investment, while for other IRAs the IRA owner is free to choose the investments. These are commonly referred to as "self-directed IRAs" (SDIRAs).

Permissible investments for IRAs include stocks, bonds, mutual funds, real estate, some coins and money market funds.

Investment in Collectibles

IRAs cannot be invested  in collectibles, which include art works, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and certain other types of tangible personal property. The one exception is that IRA assets can be invested in U.S. gold coins; silver coins minted by the Treasury Department; and certain platinum, gold, silver, palladium and platinum bullion. Volume limitations apply. (To learn more, check out IRA Assets and Alternative Investments.)

Some financial institutions place further restrictions on IRA investments.

Traditional IRAs: Distributions