Order Code RL34397
Traditional and Roth Individual Retirement
Accounts (IRAs): A Primer
Updated October 8, 2008
John J. Topoleski
Analyst in Income Security
Domestic Social Policy Division
Traditional and Roth
January 28, 2010
Congressional Research Service
7-5700
www.crs.gov
RL34397
CRS Report for Congress
Prepared for Members and Committees of Congress
Traditional and Roth Individual Retirement Accounts (IRAs):
A Primer
Summary
In response to concerns over the adequacy of retirement savings, Congress has
created incentives
to encourage individuals to save more for retirement through a
variety of retirement plans. Some
retirement plans are employer-sponsored (such as
401(k) plans), and others are established by
individual employees (such as Individual
Retirement Accounts (IRAs)).
This report describes the primary features of two common retirement savings
accounts that are
available to individuals. Both traditional and Roth IRAs offer tax
incentives to encourage
individuals to save for retirement. Although the accounts
have many features in common, they
differ in some very important aspects. This
report explains the eligibility requirements,
contribution limits, tax deductibility of
contributions, and rules for withdrawing funds from the
accounts. This report will
be updated as legislative activity warrants.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
IRA Assets and Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Traditional IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Deductibility of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Early Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Inherited IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Roth IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Eligibility and Contribution Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Conversions and Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Return of Regular Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Qualified Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Non-Qualified Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Distributions after Roth IRA Owner’s Death . . . . . . . . . . . . . . . . . . . . . . . 12
Retirement Savings Contribution Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Qualified Distributions Related to Hurricanes Katrina, Rita, and Wilma . . . . . . 15
Qualified Distributions Related to the Midwestern Disaster Relief Area . . . . . . 15
List of Tables
Table 1. Traditional and Roth IRAs: End of Year Assets . . . . . . . . . . . . . . . . . . . 2
Table 2. Traditional IRAs: Source of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 3. Deductibility of IRA Contributions for Individuals
Not Covered by a Plan at Work for 2007 and 2008 . . . . . . . . . . . . . . . . . . . 5
Table 4. Deductibility of IRA Contributions for Individuals
Covered by a Plan at Work for 2007 and 2008 . . . . . . . . . . . . . . . . . . . . . . . 5
Table 5. Inherited IRA Distribution Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 6. Roth IRA Eligibility and Contribution Limits for 2007 and 2008 . . . . . 13
Table 7. Retirement Saving Contribution Credit Income Limits
for 2007 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Traditional and Roth Individual Retirement
Accounts (IRAs): A Primer
Introduction
Individual Retirement Accounts (IRAs) are tax-advantaged accounts that
individuals (or married couples) can establish in order to accumulate funds for
retirement. Depending on the type of IRA, contributions may be made on a pre-tax
or post-tax basis, and investment earnings are either tax-deferred or tax-free.
IRAs were first authorized by the Employee Retirement Income Security Act of
1974 (ERISA, P.L. 93-406). Originally limited to workers without pension coverage,
all workers and spouses were made eligible for IRAs by the Economic Recovery Act
of 1981 (P.L. 97-34). The Tax Reform Act of 1986 (P.L. 99-514) limited the
eligibility for tax-deductible contributions to individuals whose employers do not
sponsor plans and to those whose employers sponsor plans but who have earnings
below certain thresholds. The Taxpayer Relief Act of 1997 (P.L. 105-34) allowed
for certain penalty-free withdrawals and authorized the Roth IRA, which provides
tax-free growth from after-tax contributions.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
significantly affected the contribution limits in these plans in three ways: (1) it
increased the limits, (2) it indexed the limits to inflation, and (3) it allowed for
individuals 50 and older to make additional “catch-up” contributions. Among other
provisions, the Pension Protection Act of 2006 (P.L. 109-280) temporally allowed
for tax-free distributions for charitable contributions; made permanent the indexing
of contribution limits; and allowed taxpayers to direct the IRS to deposit tax refunds
directly into an IRA.1
This report describes the two kinds of IRAs that individual employees can
establish: traditional IRAs and Roth IRAs.2 It describes the rules regarding
eligibility, contributions, and withdrawals. It also describes a tax credit for
retirement savings contributions as well as rules related to penalty-free distributions
for those affected by Hurricanes Katrina, Rita, and Wilma.
1
2
See also 26 U.S.C. § 408 for traditional IRAs and 26 U.S.C. § 408A for Roth IRAs.
For additional information, see CRS Report RL30255, Individual Retirement Accounts
(IRAs): Issues and Proposed Expansion, by Thomas L. Hungerford and Jane G. Gravelle
and CRS Report RS22019, IRAs and Other Savings Incentives: A Brief Overview, by Jane
G. Gravelle. There are also two kinds of IRAs established by employers for employees in
small businesses: Simplified Employee Pensions (SEP-IRA) and Savings Incentive Match
Plans for Employees (SIMPLE-IRA). These may be the subject of a future CRS report.
CRS-2
IRA Assets and Sources of Funds
Table 1 contains data on the end-of-year assets in traditional and Roth IRAs
from 2002 to 2006. According to the Investment Company Institute, traditional IRAs
hold much more in assets than Roth IRAs. At the end of 2006, there was $3.8 trillion
held in traditional IRAs and $178 billion held in Roth IRAs. Table 2 indicates that
within traditional IRAs, more funds flowed from rollovers from employer-sponsored
pensions compared to funds from regular contributions.3 For example, in 2004 (the
latest year data are available) funds from rollovers were $213.6 billion, while funds
from contributions were only $12.3 billion. The Investment Company Institute also
indicates that at the end of 2004, traditional IRAs and rollover IRAs each held 45%
of all IRA assets, Roth IRAs held 4% of all IRA assets, and employer-sponsored
IRAs held the remaining 6%.
Table 1. Traditional and Roth IRAs: End of Year Assets
(in billions of dollars)
2002
Traditional IRAs
Roth IRAs
2003
2004
2005
2006
2,322
2,719
2,962
3,260
3,788
78
106
126
147
178
Source: CRS table using data from the Investment Company Institute, The U.S. Retirement Market,
Second Quarter 2007, available at [http://www.ici.org/pdf/retmrkt_update.pdf].
Table 2. Traditional IRAs: Source of Funds
(in billions of dollars)
2002
Rollovers from Employer-Sponsored Pensions
Contributions from Account Holders
2003
2004
204.4
205.0
213.6
12.4
12.3
12.3
Source: CRS table using data from the Investment Company Institute, The U.S. Retirement Market,
Second Quarter 2007, available at [http://www.ici.org/pdf/retmrkt_update.pdf].
3
Generally, rollovers are tax-free distributions of assets from one retirement plan that are
contributed to a second retirement plan. Regular contributions are contributions to IRAs
that are made from individuals’ pre- or post-tax income (subject to the rules of the particular
type of IRA).
CRS-3
Traditional IRAs
Traditional IRAs are funded by workers’ contributions, which may be taxdeductible. The contributions accrue investment earnings in an account, and these
earnings are used as a basis for retirement income. Among the benefits of traditional
IRAs, two are (1) pre-tax contributions provide larger bases for accumulating
investment earnings and, thus, provide larger account balances at retirement than if
the money had been placed in taxable accounts; and (2) taxes are paid when funds are
distributed. Since income tax rates in retirement are often lower than during working
life, traditional IRA holders are likely to pay less in taxes when contributions are
withdrawn than when the income was earned.
Eligibility
Individuals who are less than 70½ years old in a year and receive taxable
compensation can set up and contribute to IRAs. Examples of compensation include
wages, salaries, tips, commissions, self-employment income, alimony, and
nontaxable combat pay.
Individuals who receive income only from
non-compensation sources cannot contribute to IRAs.
Contributions
Individuals may contribute either their gross compensation or the contribution
limit, whichever is lower. In 2007, the contribution limit was $4,000. In 2008, the
contribution limit is $5,000, and beginning in 2009, it will be indexed to inflation.
Individuals 50 and older may make additional $1,000 catch-up contributions. For
households that file a joint return, spouses may contribute an amount equal to the
couple’s total compensation (reduced by the spouse’s IRA contributions) or the
contribution limit ($4,000 each, if younger than 50, and $5,000 each, if 50 years or
older), whichever is lower. Contributions that exceed the contribution limit and are
not withdrawn by the due date for the tax return for that year are considered excess
contributions and are subject to a 6% “excess contribution” tax. Contributions made
between January 1 and April 15 may be designated for either the current year or the
previous year.
The following non-compensation sources of income cannot be used for IRA
contributions:
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earnings from property, interest, or dividends,
pension or annuity income,
deferred compensation,
income from partnerships for which an individual does not provide
services that are a material income-producing factor, and
foreign earned income.
CRS-4
Investment Options
IRAs can be set up through many financial institutions, such as banks, credit
unions, mutual funds, life insurance companies, or stock brokerages. Individuals have
an array of investment choices offered by the financial institutions and can transfer
their accounts to other financial institutions if they are unhappy with their choices.
Several transactions could result in additional taxes or the loss of IRA status.
These transactions include borrowing from IRAs, using IRAs as collateral for loans,
selling property to IRAs, and investing in collectibles like artwork, antiques, metals,
gems, stamps, alcoholic beverages, and most coins.4
Deductibility of Contributions
IRA contributions may be non-tax-deductible, partially tax-deductible, or fully
tax-deductible, depending on whether the individual or spouse is covered by a
pension plan at work and the level of adjusted gross income. Individuals are covered
by a retirement plan if (1) the individuals or their employers have made contributions
to a defined contribution pension plan, or (2) the individuals are eligible for a defined
benefit pension plan (even if they refuse participation).
For individuals and households not covered by a pension plan at work, Table
3 contains the income levels at which they may deduct all, some, or none of their IRA
contributions, depending on the spouse’s pension coverage and the household’s
adjusted gross income. Individuals without employer-sponsored pensions and, if
married, whose spouse also does not have pension coverage may deduct up to the
contribution limit from their income taxes regardless of their adjusted gross income.
For individuals and households who are covered by a pension plan at work,
Table 4 contains the income levels at which they may deduct all, some, or none of
their IRA contributions, depending on the individual’s or household’s adjusted gross
income. Individuals may still contribute to IRAs up to the contribution limit even if
the contribution is non-deductible. Non-deductible contributions come from post-tax
income, not pre-tax, income. One advantage to placing post-tax income in traditional
IRAs is that investment earnings on non-deductible contributions are not taxed until
distributed. Only contributions greater than the contribution limits as described
above are considered excess contributions. Worksheets for computing partial
deductions are included in IRS Publication 590, Individual Retirement Arrangements
(IRAs).5
4
Gold, silver, and platinum coins issued by the U.S. Treasury, and gold, silver, palladium,
and platinum bullion are permissible.
5
Available at [http://www.irs.gov/pub/irs-pdf/p590.pdf].
CRS-5
Table 3. Deductibility of IRA Contributions for Individuals
Not Covered by a Plan at Work for 2007 and 2008
Filing Status
Single, head of household,
qualifying widow(er), or
married filing jointly or
separately with a spouse who
is not covered by a plan at
work
Married filing jointly or
separately with a spouse who
is covered by a plan at work
Married filing separately with
a spouse who is covered by a
plan at work
2007 Adjusted
Gross Income
2008 Adjusted
Gross Income
Deduction
Allowed
Any amount
Any amount
Full deduction
$156,000 or less
$159,000 or less
full deduction
More than
$156,000 but less
than $176,000
More than
$159,000 but less
than $189,000
Partial deduction
$176,000 or more
$189,000 or more
No deduction
Less than $10,000
Less than $10,000
Partial deduction
$10,000 or more
$10,000 or more
No deduction
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2007-171.
Table 4. Deductibility of IRA Contributions for Individuals
Covered by a Plan at Work for 2007 and 2008
Filing Status
Single or head of household
Married filing jointly or
qualifying widow(er)
Adjusted Gross
Income in 2007
Adjusted Gross
Income in 2008
Deduction
Allowed
$52,000 or less
$53,000 or less
Full deduction
More than
$52,000 but less
than $62,000
More than
$53,000 but less
than $63,000
Partial deduction
$62,000 or more
$63,000 or more
No deduction
$83,000 or less
$85,000 or less
Full deduction
More than
$83,000 but less
than $103,000
More than
$85,000 but less
than $105,000
Partial deduction
$103,000 or more
$105,000 or more
No deduction
Less than $10,000
Less than $10,000
Partial deduction
$10,000 or more
$10,000 or more
No deduction
Married filing separately
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2007-171.
CRS-6
Withdrawals
Withdrawals from IRAs are subject to income tax in the year that they are
received.6 Early distributions are withdrawals made before the age of 59½. Early
distributions may be subject to an additional 10% penalty.
In order to ensure that IRAs are used for retirement income and not for bequests,
IRA holders must begin making withdrawals by April 1 of the year after reaching age
70½ (the required beginning date). The minimum amount that must be withdrawn
(the required minimum distribution) is found by dividing the account balance on
December 31 of the year preceding the distribution by the IRA owner’s life
expectancy as found in IRS Publication 590.7 Although females live longer on
average than males, separate life expectancy tables for males and females are not
used for this purpose by the IRS.8 Required minimum distributions must be received
by December 31 of each year. Failure to take the required minimum distribution
results in 50% excise tax on the amount not distributed as required.
In 2006 and 2007, distributions from IRAs after the age of 70½ could be made
to qualified charities and excluded from gross income. This provision for Qualified
Charitable Distributions expired December 31, 2007, and it is uncertain if Congress
will renew it.9
Early Distributions
Early distributions are withdrawals made before the age of 59½. Early
distributions — just like distributions after the age of 59½ — are subject to federal
income tax. In order to discourage the use of IRA funds for pre-retirement uses, most
early distributions are subject to a 10% tax penalty.10 The early withdrawal penalty
does not apply to distributions before the age of 59½ if they
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occur if the individual is a beneficiary of a deceased IRA owner;
occur if the individual is disabled;
6
For a detailed explanation of withdrawals from IRAs, see CRS Report RL31770,
Individual Retirement Accounts and 401(k) Plans: Early Withdrawals and Required
Distributions, by Patrick Purcell.
7
Life expectancy is calculated differently depending on whether the account holder is single
and is an IRA beneficiary, has a spouse who is more than 10 years younger, has a spouse
who is not more than 10 years younger, whose spouse is not the sole beneficiary, or is
unmarried.
8
The Supreme Court ruled in Arizona Governing Comm. v. Norris, 463 U.S. 1073 (1983),
that employer-provided pension plans must use unisex tables in calculating monthly annuity
benefits. Citing this ruling, the IRS constructs its own unisex life expectancy tables. See
26 U.S.C. § 417(e)(3)(A)(ii).
9
See CRS Report RS22766, Qualified Charitable Distributions from Individual Retirement
Accounts: A Fact Sheet, by John J. Topoleski.
10
See 26 U.S.C. § 72(t).
CRS-7
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are in substantially equal payments over the account holder’s life
expectancy;
are received after separation from employment after the age of 55;
are for unreimbursed medical expenses in excess of 7.5% of adjusted
gross income;
are for medical insurance premiums in the case of unemployment;
are used for higher education expenses;
are used to build, buy, or rebuild a first home up to a $10,000
withdrawal limit;
occur if the individual is a reservist called to active duty between
September 11, 2001, and December 31, 2007;11 or
were distributions to residents in areas affected by hurricanes
Katrina, Rita, and Wilma from around the storms’ landfalls to
January 1, 2007.
General “hardship” exceptions for penalty-free distributions from IRAs do not
exist.12
Rollovers
Rollovers are transfers of assets from one retirement plan to another upon
separation from the original employer. Rollovers are not subject to the 59½ rule, the
10% penalty, or the contribution limit. Rollovers can come from traditional IRAs,
employers’ qualified retirement plans (e.g., 401(k) plans), deferred compensation
plans of state or local governments (Section 457 plans), tax-sheltered annuities
(Section 403(b) plans), or the Thrift Savings Plan for federal employees.
Rollovers can be either direct trustee-to-trustee transfers or issued directly to
individuals who then deposit the rollovers into traditional IRAs. Individuals have 60
days to make the rollover contributions. Rollovers not completed within 60 days are
considered taxable distributions and may be subject to the 10% early withdrawal
penalty. In addition, in cases where individuals directly receive a rollover, 20% of
the rollover is withheld for tax purposes. Direct trustee-to-trustee transfers are not
subject to withholding taxes. In cases where individuals directly receive a rollover,
they must have an amount equal to the 20% withheld available from other sources
to place in the new IRA. If the entire distribution is rolled over within 60 days, the
amount withheld is applied to the individuals’ income taxes paid for the year.
11
H.R. 3997 would allow penalty-free distributions for reservists called to active duty after
December 31, 2007. As of March 3, 2008, differences between the House and Senate
versions of the bill (unrelated to this provision) have not been resolved.
12
H.R. 4627 and S. 2201 would provide for penalty-free withdrawals from IRAs, 401(k),
403(b), and 457 plans for qualified mortgage relief distributions. As of March 3, 2008, no
action has been taken on either bill.
CRS-8
Inherited IRAs
When the owner of an IRA dies, ownership passes to the account’s designated
beneficiary or, if no beneficiary has been named, to the decedent’s estate. Federal
law has different distribution requirements depending on whether the new owner is:
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a designated beneficiary who is the former owner’s spouse;
a designated beneficiary who is not the former owner’s spouse; or
a non-designated beneficiary.
The distribution rules are summarized in Table 5. The distribution rules also
depend on whether the IRA owner died prior to the required beginning date. The
required beginning date is the date on which distributions from the account must
begin. It is April 1 of the year following the year in which the owner of an IRA
reaches age 70½. Distributions from inherited IRAs are taxable income but are not
subject to the 59½ rule. Failure to take the required minimum distribution results in
a 50% excise tax on the amount not distributed as required.
Designated spouse beneficiaries who treat inherited IRAs as their own can roll
over inherited IRAs into traditional IRAs or, to the extent that the inherited IRAs are
taxable, into qualified employer plans (such as 401(k), 403(b), or 457 plans). Nonspouse beneficiaries cannot roll over any amount into or out of inherited IRAs.
In some cases, IRAs have requirements for distributions by beneficiaries that are
more stringent than those summarized in Table 5. For example, an IRA’s plan
documents could require that a designated spouse or designated nonspouse
beneficiary distribute all assets in the IRA by the end of the fifth year of the year
following the IRA owner’s death. In such a case, the beneficiary would not have the
option to take distributions over a longer period of time. Unless the IRA plan
documents specify otherwise, it is possible to take distributions faster than required
in Table 5. For example, a beneficiary may elect to distribute all assets in a single
year. In such a case, the entire amount distributed is taxable income for that year.
CRS-9
Table 5. Inherited IRA Distribution Rules
Owner Dies Before Required Beginning Date
Spouse is named as the
designated beneficiary
A nonspouse is named as the
designated beneficiary
Beneficiary is not named
Owner Dies after Required Beginning Date
Treat as own, does not have to take any distribution until the age of
70½, but is subject to the 59½ rule, or
Treat as own, does not have to take any distribution until the age of
70½, but is subject to the 59½ rule, or
Keep in decedent’s name and take distributions based on own life
expectancy. Distributions do not have to begin until decedent
would have turned 70½.
Keep in decedent’s name and take distributions based on own life
expectancy.
Take distributions based on life expectancy for beneficiary’s age as
of birthday in the year following the year of the owner’s death,
reduced by one for each year since owner’s death.
Take distributions based on the longer of
(1) beneficiary’s life expectancy, or
(2) owner’s life expectancy using age as of birthday in the year of
death, reduced by one for year after the year of death.
If the nonspouse beneficiary does not take a distribution in year of
owner’s death, then all IRA assets must be distributed by the end of
the fifth year of the year following the IRA owner’s death.
Must distribute all IRA assets by the end of the fifth year of the year
following the IRA owner’s death.
Take a yearly distribution based on the owner’s age as of birthday in
the year of death, reduced by one for each year after the year of
death.
Source: CRS analysis of IRS Publication 590.
Note: The required beginning date is the date on which distributions from the account must begin. It is April 1 of the year following the year in which the owner of an IRA reaches
age 70½.
CRS-10
Roth IRAs
Roth IRAs were authorized by the Taxpayer Relief Act of 1997 (P.L. 105-34).
The key differences between traditional and Roth IRAs are that contributions to Roth
IRAs are made with after-tax funds and qualified distributions are not included in
taxable income; hence, investment earnings accrue free of taxes.13
Eligibility and Contribution Limits
In contrast to traditional IRAs, Roth IRAs have income limits for eligibility.
Table 6 lists the adjusted gross incomes at which individuals may make the
maximum contribution and the ranges in which this contribution limit is reduced. For
example, a 40-year-old single taxpayer with income of $90,000 could contribute
$5,000 in 2008. A similar taxpayer making $110,000 could contribute $2,000.
Individuals 50 years or older can make additional $1,000 catch-up contributions.
The adjusted gross income limit for eligibility has been adjusted for inflation since
2007; the contribution limits will be adjusted for inflation beginning in 2009. A
worksheet for computing reduced Roth IRA contribution limits is provided in IRS
Publication 590.
Investment Options
Roth IRAs must be designated as such when they are set up. As with traditional
IRAs, they can be set up through many financial institutions. Transactions prohibited
within traditional IRAs are also prohibited within Roth IRAs.
Conversions and Rollovers
Individuals who (1) have modified adjusted gross incomes of less than $100,000
and (2) are not married filing a separate return may convert amounts from traditional
IRAs, SEP-IRAs, or SIMPLE-IRAs to Roth IRAs. Beginning in 2008, individuals
may rollover distributions directly from qualified retirement plans to Roth IRAs.
Amounts that would have been included in income if the conversion had not been
made must be included in income. Conversions can be a trustee-to-trustee transfer,
a same trustee transfer by redesignating the IRA as a Roth IRA, or a rollover directly
to the account holder. Inherited IRAs cannot be converted.
The rules for rollovers that apply to traditional IRAs, including completing a
rollover within 60 days, also apply. Additionally, withdrawals from a converted IRA
prior to five years from the beginning of the year of conversion are non-qualified
distributions and are subject to a 10% penalty.
Tax-free withdrawals from one Roth IRA transferred to another Roth IRA are
allowed if completed within 60 days. Rollovers from Roth IRAs to other types of
IRAs or to employer-sponsored retirement plans are not allowed.
13
Roth IRAs are named for former Senator William Roth (DE).
CRS-11
Withdrawals
The three kinds of distributions from Roth IRAs are (1) return of regular
contributions, (2) qualified distributions, and (3) non-qualified distributions. Returns
of regular contributions and qualified distributions are not included as part of taxable
income.
Return of Regular Contributions. Distributions from Roth IRAs that are
a return of regular contributions are not included in gross income nor are they subject
to the 10% penalty on early distributions.
Qualified Distributions. Qualified distributions must satisfy both of the
following:
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they are made after the five-year period beginning with the
first taxable year for which a Roth IRA contribution was
made,14 and
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they are made on or after the age of 59½; or because of
disability; or to a beneficiary or estate after death; or to
purchase, build, or rebuild a first home up to a $10,000
lifetime limit.
Non-Qualified Distributions. Distributions that are neither returns of
regular contributions nor qualified distributions are considered non-qualified
distributions. Although individuals might have several Roth IRA accounts from
which withdrawals can be made, for tax purposes non-qualified distributions are
assumed to be made in the following order:
1. the return of regular contributions,
2. conversion contributions on a first-in-first-out basis, and
3. earnings on contributions.
Non-qualified distributions may have to be included as part of income for tax
purposes. A worksheet is available in Publication 590 to determine the taxable
portion of non-qualified distributions. A 10% penalty applies to non-qualified
distributions unless one of the exceptions in 26 U.S.C. § 72(t) applies. The
exceptions are identical to those previously listed for early withdrawals from
traditional IRAs.
14
The five-year period is not necessarily five calendar years. Contributions made from
January 1 to April 15 could be considered made in the previous tax year.
CRS-12
Distributions after Roth IRA Owner’s Death
If the owner of a Roth IRA dies, the distribution rules depend on whether the
beneficiary is the spouse or a nonspouse. If the beneficiary is the spouse, then the
spouse can choose to treat the inherited Roth IRA as their own. If the spouse chooses
not to treat the inherited Roth IRA as their own, or if the beneficiary is a nonspouse,
then there are two options. The beneficiary can distribute the entire interest in the
Roth IRA (1) by the end of the fifth calendar year after the year of the owner’s death,
or (2) over the beneficiary’s life expectancy. As with an inherited traditional IRA,
a spouse can delay distributions until the decedent would have reached age 70½.
Distributions from inherited Roth IRAs are generally free of income tax. The
beneficiary may be subject to taxes if the owner of a Roth IRA dies before the end
of (1) the five-year period beginning with the first taxable year for which a
contribution was made to a Roth IRA or (2) the five-year period starting with the year
of a conversion from a traditional IRA to a Roth IRA. The distributions are treated
as described in the section of this report on non-qualified Roth IRA distributions.
CRS-13
Table 6. Roth IRA Eligibility and Contribution Limits for 2007 and 2008
Filing Status
Single,
head of household,
married filing
separately (and did
not live with spouse
at any time during
the year)
2007 Modified Adjusted
Gross Income (AGI)
2007 Contribution Limits
2008 Modified Adjusted
Gross Income (AGI)
2008 Contribution Limits
Less than $99,000
$4,000 ($5,000 if 50 years or older) or
AGI, whichever is smaller.
Less than $101,000
$5,000 ($6,000 if 50 years or older) or
AGI, whichever is smaller.
At least $99,000 but less than
$114,000
Reduced contribution limit
At least $101,000 but less than
$116,000
Reduced contribution limit
$114,000 or more
Ineligible to contribute
$116,000 or more
Ineligible to contribute
Married filing
separately and lived
with spouse at any
time during the year
less than $10,000
Reduced contribution limit
Less than $10,000
Reduced contribution limit
$10,000 or more
Ineligible to contribute
$10,000 or more
Ineligible to contribute
Married filing
jointly,
qualifying
widow(er)
Less than $156,000
$4,000 each ($5,000 each if 50 and
older) or AGI, whichever is smaller.
Less than $159,000
$5,000 each ($6,000 each if 50 and
older) or AGI, whichever is smaller.
At least $156,000 but less than
$166,000
Reduced contribution limit
At least $159,000 but less than
$169,000
Reduced contribution limit
$166,000 or more
Ineligible to contribute
$169,000 or more
Ineligible to contribute
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2007-171.
CRS-14
Retirement Savings Contribution Credit
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
authorized a non-refundable tax credit of up to $1,000 for eligible individuals who
contribute to IRAs or employer-sponsored retirement plans.15 The tax credit is in
addition to the tax deduction for contributions to traditional IRAs or other
employer-sponsored pension plans. To receive the credit, taxpayers must be at least
18 years old, not full-time students, not an exemption on someone else’s tax return,
and have adjusted gross income less than certain limits. The limits are in Table 7.
For example, individuals who make a $2,000 IRA contribution in 2007, have income
of $15,000, and list their filing status as single would be able to reduce their 2007 tax
liability by up to $1,000. Taxpayers must file form 1040, 1040A, or 1040NR. It is
not available on form 1040EZ, which may limit the use of the credit.
Table 7. Retirement Saving Contribution Credit Income Limits
for 2007 and 2008
Filing Status
Single, Married Filing Separately,
Qualifying Widow(er)
Head of Household
Married Filing Jointly
2007 Income
Limits
$1 to $15,500
$15,501 to
$17,000
$17,001 to
$26,000
more than
$26,000
$1 to $23,250
$23,251 to
$25,500
$25,501 to
$39,000
more than
$39,000
$1 to $31,000
$31,001 to
$34,000
$34,001 to
$52,000
more than
$52,000
2008 Income
Limits
Percentage
Credit
$1 to $16,000
$16,001 to
$17,250
$17,251 to
$26,500
more than
$26,500
$1 to $24,000
$24,001 to
$25,875
$25,876 to
$39,750
more than
$39,750
$1 to $32,000
$32,001 to
$34,500
$34,501 to
$53,000
more than
$53,000
50%
20%
10%
0%
50%
20%
10%
0%
50%
20%
10%
0%
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2007-171.
15
See also CRS Report RS21795, The Retirement Savings Tax Credit: A Fact Sheet, by
Patrick Purcell.
CRS-15
Qualified Distributions Related to
Hurricanes Katrina, Rita, and Wilma
In response to Hurricanes Katrina, Rita, and Wilma, Congress approved the Gulf
Opportunity Zone Act of 2005 (P.L. 109-135). The act amended the Internal
Revenue Code to allow residents in areas affected by these storms who suffered
economic losses to take penalty-free distributions up to $100,000 from their
retirement plans, including traditional and Roth IRAs. The distributions must have
been received after August 24, 2005 (Katrina), September 22, 2005 (Rita), or October
22, 2005 (Wilma), and before January 1, 2007. The distributions are taxable income
and can be reported as income either in the year received or over three years (e.g., a
$30,000 distribution made in May 2006, can be reported as $10,000 of income in
2006, 2007, and 2008). Alternatively, part or all of the distribution may be repaid to
the retirement plan within three years of receiving the distribution without being
considered taxable income.
Qualified Distributions Related to
the Midwestern Disaster Relief Area
In response to severe storms, tornados, and flooding that occurred in certain
Midwestern states, the Heartland Disaster Tax Relief Act of 2008 allows residents
of specified Midwest areas to take penalty-free distributions up to $100,000 from
their retirement plans, including traditional and Roth IRAs. This act was passed as
Division C of P.L. 110-343, the Emergency Economic Stabilization Act of 2008.
The bill amends 26 U.S.C. 1400Q, which was enacted as part of the Gulf Opportunity
Zone Act of 2005 (P.L. 109-135). The distributions must be received after the date
in which the President declared an area to be a major disaster area and before January
1, 2010.16 Apart from for the dates and the areas affected, the provisions are identical
to the provisions for individuals who were affected by Hurricanes Katrina, Rita, and
Wilma.
16
The disaster areas are limited to Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, and Wisconsin. be updated as legislative activity warrants.
Congressional Research Service
Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Contents
Introduction ................................................................................................................................1
IRA Assets and Sources of Funds ................................................................................................1
Traditional IRAs .........................................................................................................................3
Eligibility..............................................................................................................................3
Contributions ........................................................................................................................3
Investment Options ...............................................................................................................4
Deductibility of Contributions ...............................................................................................4
Withdrawals..........................................................................................................................5
Early Distributions ................................................................................................................6
Rollovers ..............................................................................................................................7
Inherited IRAs ......................................................................................................................7
Roth IRAs...................................................................................................................................8
Eligibility and Contribution Limits........................................................................................9
Investment Options ...............................................................................................................9
Conversions and Rollovers....................................................................................................9
Withdrawals..........................................................................................................................9
Return of Regular Contributions.................................................................................... 10
Qualified Distributions.................................................................................................. 10
Non-Qualified Distributions .......................................................................................... 10
Distributions after Roth IRA Owner’s Death ....................................................................... 10
Retirement Savings Contribution Credit .................................................................................... 11
Qualified Distributions Related to Hurricanes Katrina, Rita, and Wilma .................................... 12
Qualified Distributions Related to the Midwestern Disaster Relief Area .................................... 12
Tables
Table 1. Traditional and Roth IRAs: End of Year Assets ..............................................................2
Table 2. Traditional IRAs: Source of Funds .................................................................................2
Table 3. Number of Households with Individual Retirement Accounts (IRAs) in 2007.................2
Table 4. IRA Account Balances in 2007.......................................................................................3
Table 5. Deductibility of IRA Contributions for Individuals Not Covered by a Plan at
Work for 2009 and 2010...........................................................................................................5
Table 6. Deductibility of IRA Contributions for Individuals Covered by a Plan at Work
for 2009 and 2010 ....................................................................................................................5
Table 7. Inherited IRA Distribution Rules....................................................................................8
Table 8. Roth IRA Eligibility and Contribution Limits for 2009 and 2010.................................. 11
Table 9. Retirement Saving Contribution Credit Income Limits for 2009 and 2010 ................... 12
Congressional Research Service
Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Contacts
Author Contact Information ...................................................................................................... 13
Congressional Research Service
Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Introduction
Individual Retirement Accounts (IRAs) are tax-advantaged accounts that individuals (or married
couples) can establish in order to accumulate funds for retirement. Depending on the type of IRA,
contributions may be made on a pre-tax or post-tax basis, and investment earnings are either taxdeferred or tax-free.
IRAs were first authorized by the Employee Retirement Income Security Act of 1974 (ERISA,
P.L. 93-406). Originally limited to workers without pension coverage, all workers and spouses
were made eligible for IRAs by the Economic Recovery Act of 1981 (P.L. 97-34). The Tax
Reform Act of 1986 (P.L. 99-514) limited the eligibility for tax-deductible contributions to
individuals whose employers do not sponsor plans and to those whose employers sponsor plans
but who have earnings below certain thresholds. The Taxpayer Relief Act of 1997 (P.L. 105-34)
allowed for certain penalty-free withdrawals and authorized the Roth IRA, which provides taxfree growth from after-tax contributions.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) significantly
affected the contribution limits in these plans in three ways: (1) it increased the limits, (2) it
indexed the limits to inflation, and (3) it allowed for individuals aged 50 and older to make
additional “catch-up” contributions. Among other provisions, the Pension Protection Act of 2006
(P.L. 109-280) temporally allowed for tax-free distributions for charitable contributions; made
permanent the indexing of contribution limits to inflation; and allowed taxpayers to direct the IRS
to deposit tax refunds directly into an IRA. 1
This report describes the two kinds of IRAs that individual employees can establish: traditional
IRAs and Roth IRAs. 2 It describes the rules regarding eligibility, contributions, and withdrawals.
It also describes a tax credit for retirement savings contributions as well as rules related to
penalty-free distributions for those affected by Hurricanes Katrina, Rita, and Wilma.
IRA Assets and Sources of Funds
Table 1 contains data on the end-of-year assets in traditional and Roth IRAs from 2002 to 2008.
According to the Investment Company Institute, traditional IRAs held much more in assets than
Roth IRAs. At the end of 2008, there was $3.2 trillion held in traditional IRAs and $225 billion
held in Roth IRAs. IRA account balances were 25% lower at the end of 2008 compared with the
end of 2007.
Table 2 indicates that within traditional IRAs, more funds flowed from rollovers from employersponsored pensions compared to funds from regular contributions.3 For example, in 2004 (the
1
See also 26 U.S.C. § 408 for traditional IRAs and 26 U.S.C. § 408A for Roth IRAs.
2
For additional information, see CRS Report RL30255, Individual Retirement Accounts (IRAs): Issues and Proposed
Expansion, by Thomas L. Hungerford and Jane G. Gravelle and CRS Report RS22019, IRAs and Other Savings
Incentives: A Brief Overview, by Jane G. Gravelle. There are also two kinds of IRAs established by employers for
employees in small businesses: Simplified Employee Pensions (SEP-IRA) and Savings Incentive Match Plans for
Employees (SIMPLE-IRA). These may be the subject of a future CRS report.
3
Generally, rollovers are tax-free distributions of assets from one retirement plan that are contributed to a second
retirement plan. Regular contributions are contributions to IRAs that are made from individuals’ pre- or post-tax
(continued...)
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
latest year data are available) funds from rollovers were $213.6 billion, whereas funds from
contributions were only $12.3 billion. Table 3 indicates that nearly as many households had
traditional IRAs as households that had Roth and rollover IRAs combined. However, Table 4
indicates that the median balance in rollover IRAs was 82% larger than the median account
balance in traditional IRAs. The total amount in rollover IRAs was larger than the total amount in
traditional IRAs ($1.9 trillion versus $1.8 trillion).
Table 1.Traditional and Roth IRAs: End of Year Assets
(in billions of dollars)
Traditional IRAs
Roth IRAs
2002
2003
2004
2005
2006
2007
2008
$2,322
$2,719
$2,957
$3,259
$3,749
$4,197
$3,183
78
106
140
160
195
225
165
Source: CRS table using data from the Investment Company Institute, The U.S. Retirement Market, Second Quarter
2009, available at http://www.ici.org/pdf/09_q2_retmrkt_update.pdf.
Table 2.Traditional IRAs: Source of Funds
(in billions of dollars)
Rollovers from Employer-Sponsored Pensions
Contributions from Account Holders
2002
2003
2004
$204.4
$205.0
$213.6
12.4
12.3
12.3
Source: CRS table using data from the Investment Company Institute, The U.S. Retirement Market, Second Quarter
2009, available at http://www.ici.org/pdf/09_q2_retmrkt_update.pdf.
Table 3. Number of Households with Individual Retirement Accounts (IRAs) in 2007
Number of Households (millions)
Traditional IRA
20.1
Roth IRA
11.0
Rollover IRA
12.0
Only rollover IRA
7.6
Rollover and also either traditional or Roth IRA
4.4
Has any kind of IRA
35.2
Source: CRS Analysis of 2007 Survey of Consumer Finances.
(...continued)
income (subject to the rules of the particular type of IRA).
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Table 4. IRA Account Balances in 2007
Traditional IRA
Roth IRA
Rollover IRA
Median balance (dollars)
$29,000
$11,300
$53,000
Average balance (dollars)
88,986
30,288
159,315
Total of account balances
(billions of dollars)
1,791.7
334.6
1,908.3
Source: CRS Analysis of 2007 Survey of Consumer Finances.
Traditional IRAs
Traditional IRAs are funded by workers’ contributions, which may be tax-deductible. The
contributions accrue investment earnings in an account, and these earnings are used as a basis for
retirement income. Among the benefits of traditional IRAs, two are (1) pre-tax contributions
provide larger bases for accumulating investment earnings and, thus, provide larger account
balances at retirement than if the money had been placed in taxable accounts; and (2) taxes are
paid when funds are distributed. Since income tax rates in retirement are often lower than during
working life, traditional IRA holders are likely to pay less in taxes when contributions are
withdrawn than when the income was earned.
Eligibility
Individuals who are less than 70½ years old in a year and receive taxable compensation can set up
and contribute to IRAs. Examples of compensation include wages, salaries, tips, commissions,
self-employment income, alimony, and nontaxable combat pay. Individuals who receive income
only from non-compensation sources cannot contribute to IRAs.
Contributions
Individuals may contribute either their gross compensation or the contribution limit, whichever is
lower. In 2009 and 2010, the contribution limit is $5,000. Since 2009, the contribution limit has
been indexed to inflation, although the change in the Consumer Price Index was insufficient for a
cost-of-living adjustment to the 2010 contribution limit. Individuals aged 50 and older may make
additional $1,000 catch-up contributions. For households that file a joint return, spouses may
contribute an amount equal to the couple’s total compensation (reduced by the spouse’s IRA
contributions) or the contribution limit ($5,000 each, if younger than the age of 50, and $6,000
each, if 50 years or older), whichever is lower. Contributions that exceed the contribution limit
and are not withdrawn by the due date for the tax return for that year are considered excess
contributions and are subject to a 6% “excess contribution” tax. Contributions made between
January 1 and April 15 may be designated for either the current year or the previous year.
The following non-compensation sources of income cannot be used for IRA contributions:
•
earnings from property, interest, or dividends;
•
pension or annuity income;
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
•
deferred compensation;
•
income from partnerships for which an individual does not provide services that
are a material income-producing factor; and
•
foreign earned income.
Investment Options
IRAs can be set up through many financial institutions, such as banks, credit unions, mutual
funds, life insurance companies, or stock brokerages. Individuals have an array of investment
choices offered by the financial institutions and can transfer their accounts to other financial
institutions if they are unhappy with their choices.
Several transactions could result in additional taxes or the loss of IRA status. These transactions
include borrowing from IRAs, using IRAs as collateral for loans, selling property to IRAs, and
investing in collectibles like artwork, antiques, metals, gems, stamps, alcoholic beverages, and
most coins. 4
Deductibility of Contributions
IRA contributions may be non-tax-deductible, partially tax-deductible, or fully tax-deductible,
depending on whether the individual or spouse is covered by a pension plan at work and the level
of adjusted gross income. Individuals are covered by a retirement plan if (1) the individuals or
their employers have made contributions to a defined contribution pension plan, or (2) the
individuals are eligible for a defined benefit pension plan (even if they refuse participation).
For individuals and households not covered by a pension plan at work, Table 5 contains the
income levels at which they may deduct all, some, or none of their IRA contributions, depending
on the spouse’s pension coverage and the household’s adjusted gross income. Individuals without
employer-sponsored pensions and, if married, whose spouse also does not have pension coverage
may deduct up to the contribution limit from their income taxes regardless of their adjusted gross
income.
For individuals and households who are covered by a pension plan at work, Table 6 contains the
income levels at which they may deduct all, some, or none of their IRA contributions, depending
on the individual’s or household’s adjusted gross income. Individuals may still contribute to IRAs
up to the contribution limit even if the contribution is non-deductible. Non-deductible
contributions come from post-tax income, not pre-tax income. One advantage to placing post-tax
income in traditional IRAs is that investment earnings on non-deductible contributions are not
taxed until distributed. Only contributions greater than the contribution limits as described above
are considered excess contributions. Worksheets for computing partial deductions are included in
IRS Publication 590, Individual Retirement Arrangements (IRAs). 5
4
Gold, silver, and platinum coins issued by the U.S. Treasury, and gold, silver, palladium, and platinum bullion are
permissible.
5
Available at http://www.irs.gov/pub/irs-pdf/p590.pdf.
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Table 5. Deductibility of IRA Contributions for Individuals
Not Covered by a Plan at Work for 2009 and 2010
2009 Adjusted
Gross Income
2010 Adjusted
Gross Income
Deduction
Allowed
Single, head of household, qualifying widow(er), or
married filing jointly or separately with a spouse
who is not covered by a plan at work
Any amount
Any amount
Full deduction
Married filing jointly or separately with a spouse
who is covered by a plan at work
$166,000 or less
$167,000 or less
full deduction
More than $166,000
but less than
$176,000
More than $166,000
but less than
$177,000
Partial
deduction
$176,000 or more
$177,000 or more
No deduction
Less than $10,000
Less than $10,000
Partial
deduction
$10,000 or more
$10,000 or more
No deduction
Filing Status
Married filing separately with a spouse who is
covered by a plan at work
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2009-94.
Table 6. Deductibility of IRA Contributions for Individuals Covered by a Plan at
Work for 2009 and 2010
Filing Status
Adjusted Gross Income in
2009
Adjusted Gross Income in
2010
Deduction
Allowed
Single or head of household
$55,000 or less
$56,000 or less
Full deduction
More than $55,000 but less
than $65,000
More than $56,000 but less
than $66,000
Partial deduction
$65,000 or more
$66,000 or more
No deduction
$89,000 or less
$89,000 or less
Full deduction
More than $89,000 but less
than $109,000
More than $89,000 but less
than $109,000
Partial deduction
$109,000 or more
$109,000 or more
No deduction
Less than $10,000
Less than $10,000
Partial deduction
$10,000 or more
$10,000 or more
No deduction
Married filing jointly or
qualifying widow(er)
Married filing separately
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2009-94.
Withdrawals
Withdrawals from IRAs are subject to income tax in the year that they are received. 6 Early
distributions are withdrawals made before the age of 59½. Early distributions may be subject to
an additional 10% penalty.
6
For a detailed explanation of withdrawals from IRAs, see CRS Report RL31770, Individual Retirement Accounts and
401(k) Plans: Early Withdrawals and Required Distributions, by Patrick Purcell.
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
To ensure that IRAs are used for retirement income and not for bequests, IRA holders must begin
making withdrawals by April 1 of the year after reaching the age of 70½ (the required beginning
date). The minimum amount that must be withdrawn (the required minimum distribution) is
found by dividing the account balance on December 31 of the year preceding the distribution by
the IRA owner’s life expectancy as found in IRS Publication 590.7 Although females live longer
on average than males, separate life expectancy tables for males and females are not used for this
purpose by the IRS.8 Required minimum distributions must be received by December 31 of each
year. Failure to take the required minimum distribution results in 50% excise tax on the amount
not distributed as required. Congress has suspended the RMD requirement for 2009.9
Beginning in 2007, distributions from IRAs after the age of 70½ could be made directly to
qualified charities and excluded from gross income. This provision for Qualified Charitable
Distributions is set to expired December 31, 2009, unless Congress renews it.10
Early Distributions
Early distributions are withdrawals made before the age of 59½. Early distributions—just like
distributions after the age of 59½—are subject to federal income tax. In order to discourage the
use of IRA funds for pre-retirement uses, most early distributions are subject to a 10% tax
penalty.11 The early withdrawal penalty does not apply to distributions before the age of 59½ if
they
•
occur if the individual is a beneficiary of a deceased IRA owner;
•
occur if the individual is disabled;
•
are in substantially equal payments over the account holder’s life expectancy;
•
are received after separation from employment after the age of 55;
•
are for unreimbursed medical expenses in excess of 7.5% of adjusted gross
income;
•
are for medical insurance premiums in the case of unemployment;
•
are used for higher education expenses;
•
are used to build, buy, or rebuild a first home up to a $10,000 withdrawal limit;
•
occur if the individual is a reservist called to active duty after September 11,
2001;
7
Life expectancy is calculated differently depending on whether the account holder is single and is an IRA beneficiary,
has a spouse who is more than 10 years younger, has a spouse who is not more than 10 years younger, whose spouse is
not the sole beneficiary, or is unmarried.
8
The Supreme Court ruled in Arizona Governing Comm. v. Norris, 463 U.S. 1073 (1983), that employer-provided
pension plans must use unisex tables in calculating monthly annuity benefits. Citing this ruling, the IRS constructs its
own unisex life expectancy tables. See 26 U.S.C. § 417(e)(3)(A)(ii).
9
See CRS Report R40192, Early Withdrawals and Required Minimum Distributions in Retirement Accounts: Issues for
Congress, by John J. Topoleski.
10
See CRS Report RS22766, Qualified Charitable Distributions from Individual Retirement Accounts: A Fact Sheet,
by John J. Topoleski.
11
See 26 U.S.C. § 72(t).
Congressional Research Service
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
•
were distributions to residents in areas affected by hurricanes Katrina, Rita, and
Wilma from around the storms’ landfalls to January 1, 2007; or
•
were distributions to residents in areas affected by the Midwestern floods in 2008
from after the applicable disaster date and before January 1, 2010.
General “hardship” exceptions for penalty-free distributions from IRAs do not exist as individuals
may make withdrawals from IRAs without a reason.
Rollovers
Rollovers are transfers of assets from one retirement plan to another upon separation from the
original employer. Rollovers are not subject to the 59½ rule, the 10% penalty, or the contribution
limit. Rollovers can come from traditional IRAs, employers’ qualified retirement plans (e.g.,
401(k) plans), deferred compensation plans of state or local governments (Section 457 plans),
tax-sheltered annuities (Section 403(b) plans), or the Thrift Savings Plan for federal employees.
Rollovers can be either direct trustee-to-trustee transfers or issued directly to individuals who
then deposit the rollovers into traditional IRAs. Individuals have 60 days to make the rollover
contributions. Rollovers not completed within 60 days are considered taxable distributions and
may be subject to the 10% early withdrawal penalty. In addition, in cases where individuals
directly receive a rollover, 20% of the rollover is withheld for tax purposes. Direct trustee-totrustee transfers are not subject to withholding taxes. In cases where individuals directly receive a
rollover, they must have an amount equal to the 20% withheld available from other sources to
place in the new IRA. If the entire distribution is rolled over within 60 days, the amount withheld
is applied to the individuals’ income taxes paid for the year.
Inherited IRAs
When the owner of an IRA dies, ownership passes to the account’s designated beneficiary or, if
no beneficiary has been named, to the decedent’s estate. Federal law has different distribution
requirements depending on whether the new owner is a
•
designated beneficiary who is the former owner’s spouse;
•
designated beneficiary who is not the former owner’s spouse; or
•
non-designated beneficiary.
The distribution rules are summarized in Table 7. The distribution rules also depend on whether
the IRA owner died prior to the required beginning date. The required beginning date is the date
on which distributions from the account must begin. It is April 1 of the year following the year in
which the owner of an IRA reaches the age of 70½. Distributions from inherited IRAs are taxable
income but are not subject to the 59½ rule. Failure to take the required minimum distribution
results in a 50% excise tax on the amount not distributed as required.
Designated spouse beneficiaries who treat inherited IRAs as their own can roll over inherited
IRAs into traditional IRAs or, to the extent that the inherited IRAs are taxable, into qualified
employer plans (such as 401(k), 403(b), or 457 plans). Non-spouse beneficiaries cannot roll over
any amount into or out of inherited IRAs.
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
In some cases, IRAs have requirements for distributions by beneficiaries that are more stringent
than those summarized in Table 7. For example, an IRA’s plan documents could require that a
designated spouse or designated nonspouse beneficiary distribute all assets in the IRA by the end
of the fifth year of the year following the IRA owner’s death. In such a case, the beneficiary
would not have the option to take distributions over a longer period of time. Unless the IRA plan
documents specify otherwise, it is possible to take distributions faster than required in Table 7.
For example, a beneficiary may elect to distribute all assets in a single year. In such a case, the
entire amount distributed is taxable income for that year.
Table 7. Inherited IRA Distribution Rules
Spouse is named as
the designated
beneficiary
A nonspouse is
named as the
designated
beneficiary
Beneficiary is not
named
Owner Dies Before Required Beginning Date
Owner Dies after Required
Beginning Date
Treat as own, does not have to take any
distribution until the age of 70½, but is subject to
the 59½ rule, or
Treat as own, does not have to take
any distribution until the age of 70½,
but is subject to the 59½ rule, or
Keep in decedent’s name and take distributions
based on own life expectancy. Distributions do not
have to begin until decedent would have turned
70½.
Keep in decedent’s name and take
distributions based on own life
expectancy.
Take distributions based on life expectancy for
beneficiary’s age as of birthday in the year following
the year of the owner’s death, reduced by one for
each year since owner’s death.
Take distributions based on the longer
of
If the nonspouse beneficiary does not take a
distribution in year of owner’s death, then all IRA
assets must be distributed by the end of the fifth
year of the year following the IRA owner’s death.
(2) owner’s life expectancy using age as
of birthday in the year of death,
reduced by one for year after the year
of death.
Must distribute all IRA assets by the end of the fifth
year of the year following the IRA owner’s death.
Take a yearly distribution based on the
owner’s age as of birthday in the year of
death, reduced by one for each year
after the year of death.
(1) beneficiary’s life expectancy, or
Source: CRS analysis of IRS Publication 590.
Note: The required beginning date is the date on which distributions from the account must begin. It is April 1
of the year following the year in which the owner of an IRA reaches the age of 70½.
Roth IRAs
Roth IRAs were authorized by the Taxpayer Relief Act of 1997 (P.L. 105-34). The key differences
between traditional and Roth IRAs are that contributions to Roth IRAs are made with after-tax
funds and qualified distributions are not included in taxable income; hence, investment earnings
accrue free of taxes.12
12
Roth IRAs are named for former Senator William Roth (DE).
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Eligibility and Contribution Limits
In contrast to traditional IRAs, Roth IRAs have income limits for eligibility. Table 8 lists the
adjusted gross incomes at which individuals may make the maximum contribution and the ranges
in which this contribution limit is reduced. For example, a 40-year-old single taxpayer with
income of $90,000 could contribute $5,000 in 2010. A similar taxpayer making $110,000 could
contribute $2,000.
Individuals aged 50 and older can make additional $1,000 catch-up contributions. The adjusted
gross income limit for eligibility has been adjusted for inflation since 2007; the contribution
limits will be adjusted for inflation beginning in 2009. A worksheet for computing reduced Roth
IRA contribution limits is provided in IRS Publication 590.
Investment Options
Roth IRAs must be designated as such when they are set up. As with traditional IRAs, they can be
set up through many financial institutions. Transactions prohibited within traditional IRAs are
also prohibited within Roth IRAs.
Conversions and Rollovers
Through December 31, 2009, individuals who (1) have modified adjusted gross incomes of less
than $100,000 and (2) are not married filing a separate return may convert amounts from
traditional IRAs, SEP-IRAs, or SIMPLE-IRAs to Roth IRAs. The income limits for rollovers to
Roth IRAs will be eliminated beginning January 1, 2010.13 Since 2008, individuals have been
able to rollover distributions directly from qualified retirement plans to Roth IRAs. Amounts that
would have been included in income if the conversion had not been made must be included in
income. Conversions can be a trustee-to-trustee transfer, a same trustee transfer by redesignating
the IRA as a Roth IRA, or a rollover directly to the account holder. Inherited IRAs cannot be
converted.
The rules for rollovers that apply to traditional IRAs, including completing a rollover within 60
days, also apply. Additionally, withdrawals from a converted IRA prior to five years from the
beginning of the year of conversion are non-qualified distributions and are subject to a 10%
penalty.
Tax-free withdrawals from one Roth IRA transferred to another Roth IRA are allowed if
completed within 60 days. Rollovers from Roth IRAs to other types of IRAs or to employersponsored retirement plans are not allowed.
Withdrawals
The three kinds of distributions from Roth IRAs are (1) return of regular contributions, (2)
qualified distributions, and (3) non-qualified distributions. Returns of regular contributions and
qualified distributions are not included as part of taxable income.
13
The income limits for contributions to Roth IRAs will remain.
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Return of Regular Contributions
Distributions from Roth IRAs that are a return of regular contributions are not included in gross
income nor are they subject to the 10% penalty on early distributions.
Qualified Distributions
Qualified distributions must satisfy both of the following:
•
they are made after the five-year period beginning with the first taxable year for
which a Roth IRA contribution was made, 14 and
•
they are made on or after the age of 59½; or because of disability; or to a
beneficiary or estate after death; or to purchase, build, or rebuild a first home up
to a $10,000 lifetime limit.
Non-Qualified Distributions
Distributions that are neither returns of regular contributions nor qualified distributions are
considered non-qualified distributions. Although individuals might have several Roth IRA
accounts from which withdrawals can be made, for tax purposes non-qualified distributions are
assumed to be made in the following order:
1. the return of regular contributions,
2. conversion contributions on a first-in-first-out basis, and
3. earnings on contributions.
Non-qualified distributions may have to be included as part of income for tax purposes. A
worksheet is available in Publication 590 to determine the taxable portion of non-qualified
distributions. A 10% penalty applies to non-qualified distributions unless one of the exceptions in
26 U.S.C. § 72(t) applies. The exceptions are identical to those previously listed for early
withdrawals from traditional IRAs.
Distributions after Roth IRA Owner’s Death
If the owner of a Roth IRA dies, the distribution rules depend on whether the beneficiary is the
spouse or a nonspouse. If the beneficiary is the spouse, then the spouse can choose to treat the
inherited Roth IRA as their own. If the spouse chooses not to treat the inherited Roth IRA as their
own, or if the beneficiary is a nonspouse, then there are two options. The beneficiary can
distribute the entire interest in the Roth IRA (1) by the end of the fifth calendar year after the year
of the owner’s death, or (2) over the beneficiary’s life expectancy. As with an inherited traditional
IRA, a spouse can delay distributions until the decedent would have reached the age of 70½.
14
The five-year period is not necessarily five calendar years. Contributions made from January 1 to April 15 could be
considered made in the previous tax year.
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
Distributions from inherited Roth IRAs are generally free of income tax. The beneficiary may be
subject to taxes if the owner of a Roth IRA dies before the end of (1) the five-year period
beginning with the first taxable year for which a contribution was made to a Roth IRA or (2) the
five-year period starting with the year of a conversion from a traditional IRA to a Roth IRA. The
distributions are treated as described in the section of this report on non-qualified Roth IRA
distributions.
Table 8. Roth IRA Eligibility and Contribution Limits for 2009 and 2010
Filing Status
2009 Modified
Adjusted
Gross Income
(AGI)
2009 Contribution
Limits
2010 Modified
Adjusted
Gross Income
(AGI)
2010 Contribution
Limits
Less than
$105,000
$5,000 ($6,000 if 50
years or older) or AGI,
whichever is smaller.
Less than
$105,000
$5,000 ($6,000 if 50
years or older) or AGI,
whichever is smaller.
At least
$105,000 but
less than
$120,000
Reduced contribution
limit
At least
$105,000 but
less than
$120,000
Reduced contribution
limit
$120,000 or
more
Ineligible to contribute
$120,000 or
more
Ineligible to contribute
Married filing separately
and lived with spouse at
any time during the year
Less than
$10,000
Reduced contribution
limit
Less than
$10,000
Reduced contribution
limit
$10,000 or
more
Ineligible to contribute
$10,000 or
more
Ineligible to contribute
Married filing jointly,
qualifying widow(er)
Less than
$166,000
$5,000 each ($6,000
each if 50 years and
older) or AGI,
whichever is smaller.
Less than
$167,000
$5,000 each ($6,000
each if 50 and older)
or AGI, whichever is
smaller.
At least
$166,000 but
less than
$176,000
Reduced contribution
limit
At least
$167,000 but
less than
$177,000
Reduced contribution
limit
$176,000 or
more
Ineligible to contribute
$177,000 or
more
Ineligible to contribute
Single, head of
household, married filing
separately (and did not
live with spouse at any
time during the year)
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2009-94.
Retirement Savings Contribution Credit
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) authorized a nonrefundable tax credit of up to $1,000 for eligible individuals who contribute to IRAs or employersponsored retirement plans.15 The tax credit is in addition to the tax deduction for contributions to
traditional IRAs or other employer-sponsored pension plans. To receive the credit, taxpayers must
be at least 18 years old, not full-time students, not an exemption on someone else’s tax return, and
have adjusted gross income less than certain limits. The limits are in Table 9. For example,
15
See also CRS Report RS21795, The Retirement Savings Tax Credit: A Fact Sheet, by Patrick Purcell.
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individuals who make a $2,000 IRA contribution in 2009, have income of $15,000, and list their
filing status as single would be able to reduce their 2009 tax liability by up to $1,000. Taxpayers
must file form 1040, 1040A, or 1040NR. It is not available on form 1040EZ, which may limit the
use of the credit.
Table 9. Retirement Saving Contribution Credit Income Limits
for 2009 and 2010
Filing Status
Single, Married Filing Separately,
Qualifying Widow(er)
Head of Household
Married Filing Jointly
2009 Income Limits
2010 Income Limits
Percentage Credit
$1 to $16,500
$1 to $16,750
50%
$16,501 to $18,000
$16,751 to $18,000
20%
$18,001 to $27,750
$18,001 to $27,750
10%
more than $27,750
more than $27,750
0%
$1 to $24,750
$1 to $25,125
50%
$247501 to $27,000
$25,126 to $27,000
20%
$27,000 to $41,625
$27,001 to $41,625
10%
more than $41,625
more than $41,625
0%
$1 to $33,000
$1 to $33,500
50%
$33,001 to $36,000
$33,501 to $36,000
20%
$36,001 to $55,500
$36,001 to $55,500
10%
more than $55,500
more than $55,500
0%
Source: CRS analysis of IRS Publication 590 and IRS News Release IR-2009-94.
Qualified Distributions Related to Hurricanes
Katrina, Rita, and Wilma
In response to Hurricanes Katrina, Rita, and Wilma, Congress approved the Gulf Opportunity
Zone Act of 2005 (P.L. 109-135). The act amended the Internal Revenue Code to allow residents
in areas affected by these storms who suffered economic losses to take penalty-free distributions
up to $100,000 from their retirement plans, including traditional and Roth IRAs. The distributions
must have been received after August 24, 2005 (Katrina), September 22, 2005 (Rita), or October
22, 2005 (Wilma), and before January 1, 2007. The distributions are taxable income and can be
reported as income either in the year received or over three years (e.g., a $30,000 distribution
made in May 2006, can be reported as $10,000 of income in 2006, 2007, and 2008). Alternatively,
part or all of the distribution may be repaid to the retirement plan within three years of receiving
the distribution without being considered taxable income.
Qualified Distributions Related to the Midwestern
Disaster Relief Area
In response to severe storms, tornados, and flooding that occurred in certain Midwestern states,
the Heartland Disaster Tax Relief Act of 2008 allows residents of specified Midwest areas to take
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Traditional and Roth Individual Retirement Accounts (IRAs): A Primer
penalty-free distributions up to $100,000 from their retirement plans, including traditional and
Roth IRAs. This act was passed as Division C of P.L. 110-343, the Emergency Economic
Stabilization Act of 2008. The bill amends 26 U.S.C. 1400Q, which was enacted as part of the
Gulf Opportunity Zone Act of 2005 (P.L. 109-135). The distributions must be received after the
date in which the President declared an area to be a major disaster area and before January 1,
2010.16 Apart from for the dates and the areas affected, the provisions are identical to the
provisions for individuals who were affected by Hurricanes Katrina, Rita, and Wilma.
Author Contact Information
John J. Topoleski
Analyst in Income Security
jtopoleski@crs.loc.gov, 7-2290
16
The disaster areas are limited to Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska,
and Wisconsin.
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