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Traditional IRAs

Deadline to Establish and Fund an IRA

An IRA can be established and funded at any from January 1 of the current year and up to and including the date an individual’s income tax return is due (generally, April 15 of the following year), not including extensions.

Can Deduction Be Taken Prior to Investment of the Funds?

Yes! This, in effect, permits an individual to file his return early in the early (e.g. January) and use his or her tax refund to make the actual contribution prior to April 15. See Rev. Rul. 84-18, 1984-1 CB 88.

Types of Arrangements Permitted

There are currently two types of IRAs.

Individual retirement accounts:
These are trusts of custodial accounts with a corporate trustee or custodian.
Individual retirement annuities:
These are special annuities issued by an insurance company.

Contribution and Deduction Limits

A wage earner may contribute the lesser of $4,0001 or 100% of compensation for the year. If the wage earner is married, an additional $4,000 may be contributed on behalf of a lesser earning (or nonworking) spouse, using a spousal IRA. This means the family unit may contribute up to a total of $8,0002 as long as family compensation is at least that amount. If certain requirements are met, the amount contributed may also be deducted from gross income on the federal income tax return.

Other Retirement Plans May reduce or Eliminate Deductions

Taxpayers who participate in an employer’s plan may make fully-deductible IRA contributions only if their adjusted gross income (AGI) is below $75,000 if married filing jointly, $50,000 if single and $0 if married filing separately. If AGI exceeds these amounts, the $8,000 family or $4,000 individual limit is reduced by a formula tha eventually permits no deduction. No IRA deduction is allowed for married couoples filing jointly with AGI over $85,000, single individuals with an AGI over $60,000 and married couples filing separately with an individual AGI over $10,0003.

For a taxpayer who is not an active participant in an employer plan, but whose spouse is, the maximum deductible IRA contribution is phased out if their combined AGI is between $150,000 and $160,000.

Employer plans include: regular qualified plans; Keogh plans; Sec. 403(b) tax-sheltered annuity plans; simplified employee pension (SEP) plans; SIMPLE plans; and state, federal and local government plans (except Sec. 457 tax-exempt employer sponsored nonqualified deferred compensation plans).

Individuals with income in excess of the above limits may wish to make contributions to a Roth IRA on a nondeductible basis. Income limits also apply to Roth IRA contributions.

Distribution Withdrawals and Taxation

Single-sum distribution:
Becomes part of taxable income for that year (less any nondeductible contributions).
Life Expectancy:
Each year, participant calculates payout based upon the attained age life expectancy, as determined by the federal government.
Life annuity:
For individual retirement annuities only, participant/annuitant may elect guaranteed income for life (and the life of a joint annuitant may elect guaranteed income for life (and the life of a joint annuitant, if desired).
Premature distributions:
Withdrawals and distributions prior to age 591/2 are subject to a 10% penalty tax, in addition to current income tax, unless one or more of the following apply.4
  • A distribution is made because of the death or disability of the participant.
  • A distribution is paid as an annuity over the life of the participant, or the joint lives of the participant and a designated beneficiary. The 10% penalty is triggered if the distribution schedule is modified within five years of before attainment of age 591/2, if later.
  • The distribution is rolled over into another IRA.
  • The distribution is used to pay for medical expenses in excess of 7.5% of AGI.
  • The IRA is withdrawn by an unemployed individual to pay health insurance premiums. (Only applies to certain situations.).
  • The IRA distribution is used to pay for qualified, higher education expenses for the individual, a spouse, a child or a grandchild.
  • For a first-time homebuyer, there is a lifetime exception of $10,000 from the 10% penalty tax.5 The purchaser of the home may be the individual, a spouse, a child or a grandchild. A firt-time homebuyer is someone (or his or her spouse) who had not ownership in a principal residence during the preceding two years prior to the purchase of the new home.
Required distributions:
Minimum distributions must begin by April 1 of the calendar year following the year in which the participant reaches age 701/2. However, if the distribution is received in the year following attainment of age 701/2, tow distributions are required in that specific year. Thereafter, the minimum distribution must be made by the end of each calendar year. The minimum distributions may be paid using one of the two methods.
Over the life expectancy of the participant:
In general, the required minimum distribution is calculated using the IRA participant’s attained age and a minimum distribution factor table prescribed by the IRS.6
Spouse more than 10 years younger:
If the participant’s spouse is more than 10 years younger than the participant and the spouse is the IRA’s sole designated beneficiary for the entire calendar year, the minimum distribution factor used in calculating the required distribution amount is determined in accordance with the Joint and Last Survivor Table specified in Treas. Reg. 1.401(a)(9)-9, Q&A3. The participant’s marital status is determined on January 1 of the calendar year. A 50% excise tax is levied4 on amounts that should have been distributed, but were not.

Taxation of distributions

During life:
Distributions are taxable as ordinary income.7
At death:
At the participant’s demise, the distributions received by a beneficiary are taxed as ordinary income.8 If the participant dies before payments have begun, distributions must generally be paid out over a five-year period or less, or over the life expectancy of a designated beneficiary, if payments begin by December 31 of the year following the year of the participant’s death. If the distributions are paid solely to the surviving spouse, they may be paid our over the life expectancy of the spouse and must begin by the end of the year in which the participant would have attained age 701/2.9 If the surviving spouse elects to treat the IRA as his or her own, distributions must begin by April 1 of the year following the year in which the surviving spouse attains age 701/2. Caution is required in making a QTIP trust the beneficiary of an IRA. For federal estate tax purposes, the value of the IRA is included in the gross taxable estate of the participant. Proper planning is necessary to avoid losing the benefit of the marital deduction.

Investment Alternatives

  • Banks and savings and loans: Certificates of deposit are generally protected by FDIC. Fixed and variable raqtes are available. There may be stiff penalties for early withdrawal.
  • Annuities: Traditional individual retirement annuities issued by insurance companies can guarantee fixed monthly income at retirement and may include a disability-waiver-of-premium provision. Variable annuities do not guarantee a fixed monthly income at retirement.
  • Money market: Yield fluctuates with the economy. Investor cannot lock in the higher interest rates. It is easy to switch to other investments.
  • Mutual funds: Capital gains, interest and dividends are tax-deferred in an IRA but are taxed as ordinary income at withdrawal.
  • Zero coupon: Bonds are bought at deep discount originally. There are not interest payments to worry about rinvesting. Zero coupon bonds are subject to inflation risk and interest rate risk.
  • Stocks and Bonds: A wide variety of investments and risk is possible. Capital gains are taxed as ordinary income at withdrawal. Losses are generally not deductible.
  • Limited partnerships: Some limited partnerships are especiall designed for qualified plans, specifically in the areas of real estate and mortgage pools.

Prohibited Investments or Transactions for IRAs

  • Life Insurance: IRAs cannot include life insurance contracts.
  • Loans to IRA taxpayer: Sef-borrowing disqualifies the IRA and triggers constructive distribution of the entire amount deemed distributed. It becomes currently taxable plus a 10% penalty if the account owner is under age 591/2.
  • Collectibles: Purchases of art works, antiques, metals, gems, stamps, etc., will be treated as a taxable distribution. Coins issued under state law and certain U.S. gold, silver and platinum coins are exceptions. Some kinds of bullion may be purchased.
  • IRA as collateral: Using the IRA as security for a loan, e.g. buying stock on margin, will trigger a distribution tax.

Other Factors to Consider

  • Is the interest rate fixed or variable? If interest rates drop, a fixed rate is better, especially if you can make future contributions at the same fixed rate. If interest rates go up, you may be able to roll the current IRA over to another IRA.
  • What is the yield? More frequent compounding will produce a higher return.
  • How often can you change investments? What is the charge?
  • Federal bankruptcy law protects assets in traditional IRA accounts, up to $1,000,000. In future years, the $1,000,000 limit will be indexed for inflation. Funds rolled over from qualified plans are protected without limit.

Securities offered through
Ogilvie Security Advisors, Corp.
900 N. Michigan Avenue Suite 1860, Chicago, IL 60611
(312) 335-5476
Member NASD/SIPC