FAQs About IRAs

The IRS defines an IRA (Individual Retirement Account) as a trust created for the benefit of individuals or their beneficiaries. However, the trust must meet specific requirements as specified in Internal Revenue Code Section 408.

In addition to providing an additional source of retirement income, the earnings on funds deposited in a traditional IRA are tax-deferred until they are distributed. IRA owners may also be eligible for a tax deduction for contributions made to a traditional IRA.

Beginning in 2020, any individual who has earned income is eligible to make an IRA contribution.

Earned income or compensation is income received for personal services actually rendered. Wages, tips, bonuses, sick pay and vacation pay qualify as earned income. Self-employed individuals must use their net income as earned income.

Passive income such as earnings and profits from rental income, interest or dividend earnings from investments, pension or annuity income, and deferred compensation are not considered earned income for determining IRA contributions.

Beginning in the year 2002, individuals may contribute up to 100% of their earned income not exceeding the following contribution limits:

Year Under Age 50 Age 50 and Over
2006 and 2007 $4,000.00 $5,000.00
2008 – 2012 $5,000.00 $6,000.00
2013 – 2018 $5,500.00 $6,500.00
2019 – 2021  $6,000.00 $7,000.00

The only requirement is that the IRA must be established and the contribution made no later than April 15, or the following Monday if the 15th falls on a weekend or holiday.

A spousal contribution may be made for an individual by his/her spouse when one individual has little (less the contribution limits) or no income. However, in order to make a spousal contribution, the couple must be legally married at the end of the tax year; they must file a joint tax return; their joint combined compensation must be considered to determine the total contribution amount; and the spouse receiving the contribution must earn less than the spouse contributing the contribution. Separate IRA’s must be maintained for each spouse.

The maximum combined contributions for both spouses are the annual contribution limits or 100 percent of their combined earned income (the lesser of the two amounts). The contributions may be divided in any manner as long as neither spouse’s contributions exceed the annual contribution limit.

If an individual is not an active participant in a qualified plan, the IRA contributions are fully deductible. Also, for married couples, if neither spouse is an active participant in a qualified plan, contributions are fully deductible. However, if a single individual or either spouse of a married couple is an active participant in a qualified plan, the deductibility is subject to Modified Adjusted Gross Income (MAGI) limitations.

An individual who is not eligible to make a deductible contribution may make a nondeductible contribution provided they have earned income and will not attain age 70½ in the contribution tax year.

Qualified plans are tax-exempt trust accounts that are established for the benefit of the participant in the plan.

When the assets in a qualified plan are distributed to the plan participant in a negotiable form, the participant may roll all or part of the distribution to another qualified plan or an IRA within 60 days of the receipt of the distribution. The plan administrator must withhold 20 percent for federal income tax when the check or property is disbursed in the name of the plan participant.

A direct rollover occurs when an eligible plan participant directs the administrator of a qualified plan to make the distribution check or assets payable to a successor trustee or custodian instead of the participant. The distribution and rollover of the assets allows the recipient to avoid taxation and the 20 percent federal income tax withholding.

The one-rollover-per-12-months rule does not apply to qualified plan-to-IRA rollovers.

IRA participants can take distribution from the plans at any time; however, prior to age 59 1/2 and depending on the reason for the distribution, they may be subject to an IRS 10 percent premature distribution penalty as well as the bank penalty. After age 59 1/2 distributions are no longer considered premature distributions.

The distributed funds must be used for expenses incurred by the IRA owner, spouse, child or grandchild of the IRA owner who is enrolled at least half time at an eligible institution of higher education. Qualified expenses include tuition, fees, books, supplies and equipment that are required for enrollment. Certain room and board expenses may also be included.

If born before July 1, 1949, required minimum distributions must begin the year the participant attains age 70½. If born on or after July 1, 1949, RMDs must start at age 72. However, in the first RMD year, the IRA owner can defer the distribution until April 1 of the following year. This would result in two distributions in one year – a distribution for the previous year and a distribution for the current year.

IRA owners can combine their required distributions and withdraw them from one of their IRAs.

  • Roth IRAs are not tax deductible.
  • Roth IRA contributions are subject to modified adjusted gross income limits.
  • Contributions to Roth IRAs can continue after age 70½.
  • Roth IRA owners are not subject to the required minimum distribution rules.
  • Contributions are distributed before earnings.
  • Distributions may be tax free.

What types of investments are allowed for Roth IRA contributions?
Certificates of deposits, mutual funds, stocks, bonds, real estate, etc., are popular investments. The bank has the ability to limit the investments offered in their IRA program. Investments in collectibles, gems, stamps, coins and life insurance plan agreements are not allowed in an IRA.

Individuals can contribute up to 100% of their earned income (subject to modified adjusted gross income limits) for the tax year not exceeding the following contribution limits:

Year Under Age 50 Age 50 and Over
2006 and 2007 $4,000.00 $5,000.00
2008 – 2012 $5,000.00 $6,000.00
2013 – 2018 $5,500.00 $6,500.00
2019 – 2021 $6,000.00 $7,000.00


IRA owners can contribute to a Roth IRA and a traditional IRA in the same tax year, but the total of their contributions cannot exceed the contribution limits.

Roth IRA owners can take distributions at any time. And they can withdraw regular contributions without IRS penalty at any time for any reason. However, depending on the reason for the distribution, the age of the owner, and whether or not their five-year holding period has expired, they may be subject to taxes and the IRS 10 percent premature distribution penalty on the earnings that are withdrawn.

The five-year holding period begins the first year for which a Roth IRA or conversion contribution is made.

The five-year holding period is per Roth IRA owner and not per each separate Roth IRA.

Distributions for qualified higher education expenses are exempt from IRS penalty and federal income tax.

Any individual whose modified adjusted gross income falls within the prescribed limits can contribute to a Coverdell Education Savings Account for an eligible individual.

The designated beneficiary is the individual for whom the account is established.

The responsible individual must be a parent or legal guardian of the designated beneficiary.

The annual contribution limit is $2000 per designated beneficiary per tax year.

The only restriction concerning total contributions to education IRAs is that total contributions for any one designated beneficiary cannot exceed $2000 per year.

Education IRA contributions are not tax deductible.

Qualified higher education expenses include tuition, fees, books, supplies and equipment required for the designated beneficiary’s enrollment or attendance at an eligible education institution. If the student lives off campus, room and board expenses up to $2,500 per year are also qualified higher education expenses.

I. Contributions will qualify as eligible contributions even if contributions are being made to a state tuition program.

II. Tax-free distributions will qualify in any year the Hope Scholarship credit is taken as long as it is not being used for the same expense.

III. Contribution limits increase to $2,000 per child.

IV. The contributor may be someone other than an individual; a company or nonprofit organization can make contributions for a minor regardless of income phase out.

V. The deadline for making contribution to a Coverdell Education Savings Account will be the tax-filing deadline not including extensions – the same as traditional and Roth deadlines. The deadline will be April 15 for the previous year’s contributions.

An IRA rollover occurs when an individual receives an IRA distribution and redeposits the funds into an IRA within 60 days of the date of receipt. This avoids the 10 percent IRS distribution penalty and taxation on the distribution amount.

The rollover must be completed within 60 calendar days. If the funds have not been rolled over within 60 calendar days from the date of receipt, the distribution must be reported as income the year of the distribution. Certain first-time homebuyer distributions may be rolled over within 120 calendar days.

Effective Aug. 24, 2016, financial institutions may accept “tardy rollovers” after the 60-day period if the IRA accountholder “self-certifies” the reason for the delay for certain acceptable situations.

The distribution amount is considered a rollover if the funds are deposited into an IRA no later than the 60th day after the date of receipt of the funds. The date of receipt might not be the date of the distribution.

Beginning Jan. 1, 2015, an IRA accountholder will only be able to do one tax-free 60-day rollover from the total IRAs owned by the accountholder in a 12-month period beginning from the day of receipt of the funds – regardless of how many IRA plans or plan types owned.

There is no age restriction on IRA rollovers. However, IRA owners cannot roll over their required minimum distribution from a traditional IRA.

Transfers occur when the funds in an IRA account are moved directly from one financial institution to another financial institution without the IRA owner ever having control of the assets.

Since the IRA owner does not have direct control of the funds, the IRA transfer option is unlimited.

FAQs About SEP and SIMPLE Programs

A SEP is a retirement plan that allows an employer to provide a retirement plan for employees by making a contribution to each eligible employee’s traditional IRA. Any employer whether incorporated or unincorporated, part-time or full-time, can establish a SEP plan. This includes businesses that have no employees other than the owner/employee.

In 2021, the maximum percentage is 25% of eligible compensation and the maximum compensation limit is $290,000. The maximum annual SEP contribution is 25% of up to $290,000 or $58,000, whichever is less per employee per year.

The business must have no more than 100 employees who each earned at least $5,000 in the preceding calendar year. The employer must consider all employees whether or not they will be eligible to participate in the SIMPLE and cannot at any time during the calendar year of the SIMPLE maintain any other qualified plan, SEP or tax-sheltered annuity.

The employer must allow employees to participate if they have earned at least $5,000 of compensation in each of any two preceding years and they are expected to receive at least $5,000 for the current year. An employer can also be less restrictive by lowering the income thresholds or requiring less than two years. However, they cannot make the requirements more restrictive.

Each employee is immediately 100% vested and can take distributions as soon as the money is deposited. If the employee is younger than age 59 1/2 and takes a distribution within two years of the first contribution, a 25% premature distribution penalty will apply and the distribution will be fully taxable. Distributions after the two-year period but before age 59 1/2 will be subject to a 10% premature distribution penalty and the distribution will be fully taxable. Certain exception distributions may be exempt from the premature distribution penalty.

Simple contributions may be made to SIMPLE IRAs only. It is possible to convert a SIMPLE to a Roth after two years but all subsequent SIMPLE contributions must be made to a SIMPLE IRA.

The minimum distribution requirements for a traditional IRA also apply to SIMPLE IRAs.

The employer may require that each eligible employee establish a SIMPLE IRA with a particular financial institution. The designated financial institution must agree that a participant may transfer the SIMPLE IRA contributions without cost or penalty to a financial institution selected by the participant.

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