Click here for the Traditional IRA Custodial Agreement

The "Traditional" is the original IRA, sometimes also called an ordinary or regular IRA. Two advantages of a traditional IRA are that:

1. You may be able to deduct some or all of your contributions to it, depending on your circumstances, and,


2. Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed.

A traditional IRA is any IRA that is not a Roth IRA, a SIMPLE IRA, or an education IRA.


You can set up and make contributions to a traditional IRA if you (or, if you file a joint return, your spouse) received taxable compensation (defined later) during the year and you were not age 70 1/2 by the end of the year. You can have a traditional IRA whether or not you are an active participant in (covered by) any other retirement plan. However, you may not be able to deduct all of the contributions if you or your spouse are covered by an employer retirement plan. See How Much Can I Deduct? later.


As stated earlier, to set up and contribute to a traditional IRA, you or your spouse must have received taxable compensation. This rule applies to both deductible and nondeductible contributions. Generally, what you earn from working is compensation.

Compensation includes the following:

Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2.

Commissions. An amount you receive that is a percentage of profits or sales price is compensation.

Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is your net earnings from your trade or business (provided your personal services are a material income-producing factor), reduced by your deduction for contributions made on your behalf to retirement plans and the deduction allowed for one-half of your self-employment taxes.

If you invest in a partnership and do not provide services that are a material income-producing factor, your share of partnership income is not compensation.

Compensation also includes earnings from self-employment that are not subject to self-employment tax because of your religious beliefs. When you have both self-employment income and salaries and wages, your compensation is the sum of the amounts.

Self-employment loss. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.

Alimony and separate maintenance. Treat as compensation any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.

Compensation does not include any of the following items.

1. Earnings and profits from property, such as rental income, interest income, and dividend income.


2. Pension or annuity income.


3. Deferred compensation received (compensation payments postponed from a past year).


4. Foreign earned income and housing cost amounts that you exclude from income.


5. Any other amounts that you exclude from income.

You can set up a traditional IRA at any time. However, the time for making contributions for any year is limited. See When Can I Make Contributions?, later.

You can set up different kinds of IRAs with a variety of organizations. You can set up an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also set up an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements.

An individual retirement account is a trust or custodial account set up in the United States for your exclusive benefit or for the benefit of your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.

1. The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.


2. The trustee or custodian generally cannot accept contributions of more than $2,000 a year. However, rollover contributions and employer contributions to a simplified employee pension (SEP), as explained in chapter 4, can be more than $2,000.


3. Contributions must be in cash, except that rollover contributions can be property other than cash. See Rollovers later.


4. The amount in your account must be fully vested (you must have a nonforfeitable right to the amount) at all times.


5. Money in your account cannot be used to buy a life insurance policy.


6. Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.


7. You must start receiving distributions from your account by April 1 of the year following the year in which you reach age 70 1/2. For detailed information on distributions from your IRA, see When Must I Withdraw IRA Assets (Required Distributions), later.

If you inherit a traditional IRA, that IRA becomes subject to special rules. A traditional IRA is included in the estate of the decedent who owned it.

Unless you are the decedent's surviving spouse, you cannot treat an inherited traditional IRA as your own. This means that unless you are the surviving spouse, contributions (including rollover contributions) cannot be made to the IRA and you cannot roll it over. But, like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it.

If you are a surviving spouse, you can elect to treat a traditional IRA inherited from your spouse as your own. You will be treated as having made this election if:

1. Contributions (including rollover contributions) are made to the inherited IRA, or


2. Required distributions are not made from it.

As soon as your traditional IRA is set up, you can make contributions (put money in) to it. Contributions must be in the form of money (cash, check or money order). You cannot contribute property or securities. However, you may be able to transfer or roll over certain property from one retirement plan to another. See the discussion of rollovers and other transfers later.

You can make contributions to your traditional IRA each year that you qualify. To qualify to make contributions, you must have received compensation and have not reached age 70 1/2 during the year. For any year in which you do not work, you cannot make IRA contributions unless you receive alimony or file a joint return with a spouse who has compensation. See Who Can Set Up a Traditional IRA? earlier. Even if you do not qualify to make contributions for the current year, the amounts you contributed for years in which you did qualify can remain in your IRA. You can resume making contributions for any years that you qualify.


There are limits and other rules that affect the amount you can contribute. These limits and rules are explained below.

General limit. The most that you can contribute for any year to your traditional IRA is the smaller of the following amounts:

1. Your compensation (defined earlier) that you must include in income for the year, or


2. $2000 for tax year 2001. $3000 for tax year 2002, $3500 for tax year 2002 if you are 50 years of age or older.

This is the most you can contribute regardless of whether your contributions are to one or more traditional IRAs or whether all or part of your contributions are nondeductible (see Nondeductible Contributions, later). Also note: contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA.

Examples. Betty, who is single, earns $24,000 in 2001. Her IRA contributions for 2001 are limited to $2,000.
John, a college student working part time, earns $1,500 in 2001. His IRA contributions for 2001 are limited to $1,500, the amount of his compensation.

Spousal IRA limit. If you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts:

1. $3,000, or


2. The total compensation includable in the gross income of both you and your spouse for the year reduced by the following two amounts.


1. Your spouse's IRA contribution for the year.


2. Any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $6,000.

Example. Christine, a full-time student with no taxable compensation, marries Paul during the year. For the year, Paul has taxable compensation of $30,000. He plans to contribute (and deduct) $3,000 to a traditional IRA. If he and Christine file a joint return, each can contribute $3,000 for the year to a traditional IRA. This is because Christine, who has no compensation, can add Paul's compensation, reduced by the amount of his IRA contribution, ($30,000 - $3,000 = $27,000) to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $3,000 is her contribution limit, because $3,000 is less than $27,000 (her compensation for purposes of figuring her contribution limit).

Age 70 1/2 rule. Contributions cannot be made to your traditional IRA for the year you reach age 70 1/2 or any later year.

Community property laws - effect on separate computations. Except as just discussed under Spousal IRA limit, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws.

Filing status. Generally, except as discussed earlier under Spousal IRA limit, your filing status has no effect on the amount of your allowable contribution to a traditional IRA. However, if during the year either you or your spouse were covered by a retirement plan at work, your deduction may be reduced or eliminated, depending on your filing status and income. See How Much Can I Deduct? later.

Example. Sam and Helen are married and both are under age 70 1/2. They both work and each has a traditional IRA. Sam earned $1,800 and Helen earned $48,000 in 1998. Even though Sam earned less than $2,000, they can contribute up to $2,000 to his IRA for the year, under the spousal IRA limit rule, if they file a joint return. They can contribute up to $2,000 to Helen's IRA. If they file separate returns, the amount that can be contributed to Sam's IRA is limited to $1,800.

Contributions not required. You do not have to contribute to your traditional IRA for every tax year, even if you can.

Less than maximum contributions. If contributions to your traditional IRA for a year were less than the limit, you cannot contribute more in a later year to make up the difference.

Example. Paul earns $30,000 in 1998. Although he can contribute up to $2,000 for 1998, he contributes only $1,000. Paul cannot make up the $1,000 ($2,000 - $1,000) difference between his actual contributions for 1998 and his 1998 limit by contributing $1,000 more than the limit in 1999 or any later year.

More than maximum contributions. If contributions to your IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. See Excess Contributions,later.

More than one IRA. If you have more than one IRA, the limit applies to the total contributions made on your behalf to your traditional IRAs for the year.

Both spouses have compensation. If both you and your spouse have compensation and are under age 70 1/2, each of you can set up an IRA. You cannot both participate in the same IRA.

Inherited IRAs. If you inherit a traditional IRA from your spouse, you can choose to treat it as your own by making contributions to it. See Inherited IRAs earlier.

If, however, you inherit a traditional IRA and you are not the decedent's spouse, you cannot contribute to that IRA, because you cannot treat it as your own.

Brokers' commissions. Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit and are not deductible as a miscellaneous deduction on Schedule A (Form 1040).

Trustees' fees. Trustees' administrative fees are not subject to the contribution limit. A trustee's administrative fees that are billed separately and paid in connection with your traditional IRA are deductible. They are deductible (if they are ordinary and necessary) as a miscellaneous deduction on Schedule A (Form 1040). The deduction is subject to the 2%-of-adjusted-gross- income limit.


You can make contributions to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 1999 must be made by April 15, 2000.

Designating year for which contribution is made. If you contribute an amount to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor can assume, for reporting to the IRS, that the contribution is for the current year (the year the sponsor received it).

Filing before making your contribution. You can file your return claiming a traditional IRA contribution before you actually make the contribution. You must, however, make the contribution by the due date of your return, not including extensions.


Generally, you can deduct the lesser of the contributions to your traditional IRA for the year or the general limit (or spousal IRA limit, if applicable). However, if you or your spouse were covered by an employer retirement plan at any time during the year for which you made contributions, you may not be able to deduct all of the contributions. Your deduction may be reduced or eliminated, depending on the amount of your income and your filing status, as discussed later under Deduction Limits. Any limit on the amount you can deduct does not affect the amount you can contribute. See Nondeductible Contributions later.


This table sums up whether you can take a full deduction, a partial deduction, or no deduction.

If your Modified AGI * is:		If You're Covered by a Retirement Plan & Your Filing Status is:			If You're NOT Covered by a Retirement Plan & Your Filing Status is:
		Single Head of Household	Married Filing Jointly (even if your spouse is not covered by a plan at work) Qualifying Widow(er)	Married Filing Separately **	Married Filing Jointly (and your spouse is covered by a plan at work)	Single Head of Household	Married Filing Jointly or Separately (and spouse is not covered by a plan at work) Qualifying Widow(er)	Married Filing Separately (and your spouse is covered by a plan at work) ***
At Least	Less Than	How much Deduction you can take ?
$0.01	$10,000.00	Full	Full	Partial	Full	Full	Full	Partial
$10,000.00	$30,000.01	Full	Full	None	Full	Full	Full	None
$30,000.01	$40,000.00	Partial	Full	None	Full	Full	Full	None
$40,000.00	$50,000.01	None	Full	None	Full	Full	Full	None
$50,000.01	$60,000.00	None	Partial	None	Full	Full	Full	None
$60,000.00	$150,000.01	None	None	None	Full	Full	Full	None
$150,000.01	$160,000.00	None	None	None	Partial	Full	Full	None
$160,000.01	and over	None	None	None	None	Full	Full	None
*Modified AGI (adjusted gross income) is (1) for Form 1040A--tha amount on line 14 increased by any excluded series EE bond interest shown on Form 8815, and certain tax-exempt amounts, or (2) for Form 1040-- the amount on line 33, figured without taking into account any IRA deduction or any foreign earned income exclusion and foreign housing exclusion (deduction), any student loan interest deduction, any series EE bond interest exclusion from Form 8815, and certain tax-exempt income amounts. **If you did not live with your spouse at any time during the year, your filing status is considered, for this purpose, as Single (therefore your IRA deduction is determined under the "Single" column. ***You are entitled to the dull deduction if you did not live with your spouse at any time during the year.

The Form W-2, Wage and Tax Statement you receive from your employer has a box used to indicate whether you were covered for the year. The "Pension Plan" box should have a mark in it if you were covered.

If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer.

Employer plans. An employer retirement plan is one that an employer sets up for the benefit of its employees. For purposes of the traditional IRA deduction rules, an employer retirement plan is any of the following plans.

1. A qualified pension, profit-sharing, stock bonus, money purchase pension, etc., plan (including Keogh plans).


2. A 401(k) plan (generally an arrangement included in a profit-sharing or stock bonus plan that allows you to choose to take part of your compensation from your employer in cash or have your employer pay it into the plan).


3. A union plan (a qualified stock bonus, pension, or profit-sharing plan created by a collective bargaining agreement between employee representatives and one or more employers).


4. A qualified annuity plan.


5. A plan established for its employees by the United States, a state or political subdivision thereof, or by an agency or instrumentality of any of the foregoing (other than an eligible state deferred compensation plan (section 457(b) plan)).


6. A tax-sheltered annuity plan for employees of public schools and certain tax-exempt organizations (403(b) plan).


7. A simplified employee pension (SEP) plan.


8. A 501(c)(18) trust (a certain type of tax-exempt trust created before June 25, 1959, that is funded only by employee contributions) if you made deductible contributions during the year.


9. A SIMPLE plan.

A qualified plan is one that meets the requirements of the Internal Revenue Code.


Special rules apply to determine whether you are considered covered by (an active participant in) a plan for a tax year. These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan.

Defined contribution plan. Generally, you are considered covered by a defined contribution plan if amounts are contributed or allocated to your account for the plan year that ends within your tax year.

A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. Benefits are based only on amounts contributed to or allocated to each account. Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans.

Example. Company A has a money purchase pension plan. Its plan year is from July 1 to June 30. The plan provides that contributions must be allocated as of June 30. Bob, an employee, leaves Company A on December 30, 1999. The contribution for the plan year ending on June 30, 2000, is not made until February 15, 2001 (when Company A files its corporate income tax return). In this case, Bob is considered covered by the plan for his 2000 tax year.

No vested interest. If an amount is allocated to your account for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the account.

Defined benefit plan. If you are eligible (meet minimum age and years of service requirements) to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are considered covered by the plan. This rule applies even if you declined to be covered by the plan, you did not make a required contribution, or you did not perform the minimum service required to accrue a benefit for the year.

A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on a computation of what contributions are necessary to provide definite benefits to plan participants. Defined benefit plans include pension plans and annuity plans.

Example. John, an employee of Company B, is eligible for coverage under Company B's defined benefit plan with a July 1 to June 30 plan year. John leaves Company B on December 30, 1997. Since John is eligible for coverage under the plan for its year ending June 30, 1998, he is considered covered by the plan for his 1998 tax year.

No vested interest. If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual.

Judges. For purposes of figuring the IRA deduction, federal judges are considered covered by an employer retirement plan.


You are not covered by an employer plan in the following situations.

Social security or railroad retirement. Coverage under social security or railroad retirement (Tier I and Tier II) does not count as coverage under an employer retirement plan.

Benefits from previous employer's plan. If you receive retirement benefits from a previous employer's plan and you are not covered under another employer plan, you are not considered covered by a plan.

Reservists. If the only reason you participate in a plan is because you are a member of a reserve unit of the armed forces, you may not be considered covered by the plan. You are not considered covered by the plan if both of the following conditions are met.

1. The plan you participate in is established for its employees by:


1. The United States,


2. A state or political subdivision of a state, or


3. An instrumentality of either (a) or (b) above.


2. You did not serve more than 90 days on active duty during the year (not counting duty for training).

Volunteer firefighters. If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be considered covered by the plan. You are not considered covered by the plan if both of the following conditions are met.

1. The plan you participate in is established for its employees by:


1. The United States, A state or political subdivision of a state, or


2. An instrumentality of either (a) or (b) above.


2. Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement.

As discussed under How Much Can I Deduct?, earlier, the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse were covered for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and your filing status, as explained later under Reduced or no deduction.

Full deduction. If neither you nor your spouse were covered for any part of the year by an employer retirement plan, you can take a deduction for your total contributions to one or more traditional IRAs of up to $2,000, or 100% of compensation, whichever is less. This limit is reduced by any contributions to a 501(c)(18) plan.

Spousal IRA. In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the smaller of the following two amounts:

1. $2,000, or


2. The total compensation includible in the gross income of both you and your spouse for the year reduced by the following two amounts.


1. Your spouse's IRA deduction for the year.


2. Any contributions for the year to a Roth IRA on behalf of your spouse.

This limit is reduced by any contributions to a section 501(c)(18) plan on behalf of the spouse with less compensation.

Reduced or no deduction. If either you or your spouse were covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. The amounts vary depending on your filing status. See Table earlier.

Adjusted gross income limit. The effect of income on your deduction, as just described, is sometimes called the adjusted gross income limit. To determine if your deduction is subject to the limit and to compute your reduced traditional IRA deduction, you must first determine your "modified adjusted gross income" and your filing status, as explained next under Deduction phaseout.


If you are covered by an employer retirement plan, your IRA deduction is reduced or eliminated entirely depending on your filing status and modified AGI as shown in the following Table A.

Table A

If your filing status is:	Your IRA deduction is reduced if your modified AGI is between:	Your deduction is eliminated if your modified AGI is:
Single, or Head of household	$30,000 and $40,000	$40,000 or more
Married--joint return, or Qualifying widow(er)	$50,000 and $60,000	$60,000 or more
Married--separate return	$0 -- and $10,000	$10,000 or more

For 1999, if you are covered by a retirement plan at work, your IRA deduction will not be reduced (phased out) unless your modified adjusted gross income (AGI) is between:

1. $31,000 (a $1,000 increase) and $41,000 for a single individual (or head of household),


2. $51,000 (a $1,000 increase) and $61,000 for a married couple (or a qualifying widow(er)) filing a joint return, or


3. $-0- (no increase) and $10,000 for a married individual filing a separate return.

If you are not covered by an employer retirement plan, but your spouse is, your IRA deduction is reduced or eliminated entirely depending on your filing status and modified AGI as shown in the following Table B.

Table B

If your filing status is:	Your IRA deduction is reduced if your modified AGI is between:	Your deduction is eliminated if your modified AGI is:
Married--joint return	$150,000 and $160,000	$160,000 or more
Married--separate return	$0 -- and $10,000	$10,000 or more

Filing status. Your filing status depends primarily on your marital status. For this purpose you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately.

Married filing separate exception. If you did not live with your spouse at any time during the year and you file a separate return, you are not treated as married and your filing status is considered, for this purpose, as single.


The trustee or issuer (sometimes called the sponsor) of the traditional IRA you choose generally must give you a disclosure statement about your arrangement at least 7 days before you set up your IRA. However, the sponsor can give you the statement by the date you set up (or purchase, if earlier) your IRA, if you are given at least 7 days from that date to revoke the IRA. If you revoke your IRA within the revocation period, the sponsor must return to you the entire amount you paid. The sponsor must report on the appropriate IRS forms both your contribution to the IRA (unless by a trustee-to-trustee transfer) and the distribution to you upon your revocation of the IRA. These requirements apply to all sponsors.

Generally, the sponsor is the bank or brokerage that is the trustee of the account or the insurance company that issued the annuity contract.

Disclosure statement. The disclosure statement given to you by the plan sponsor must contain plain-language explanations of certain items. For example, the statement should provide information on when and how you can revoke the IRA, including the name, address, and telephone number of the person to receive the notice of cancellation. This explanation must appear at the beginning of the disclosure statement.