1. Traditional IRAs

What's New for 2007

Modified AGI limit for traditional IRA contributions increased. For 2007, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

More than $83,000 but less than $103,000 for a married couple filing a joint return or a qualifying widow(er),
More than $52,000 but less than $62,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

For 2007, if you either lived with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you are not, your deduction is phased out if your modified AGI is more than $156,000 but less than $166,000. If your AGI is $166,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct, in this chapter.

Rollover by nonspouse beneficiary. A direct transfer from a deceased employee's qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity (section 403(b)) plan, or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. The IRA is treated as an inherited IRA. For more information about rollovers, see Rollovers under Can You Move Retirement Plan Assets? in this chapter.

Catch-up contributions in certain employer bankruptcies. If you participated in a 401(k) plan and the employer who maintained the plan went into bankruptcy in an earlier year, you may be able to contribute up to $7,000 to your traditional IRA. See Catch-up contributions in certain employer bankruptcies under How Much Can Be Contributed? in this chapter.

What's New for 2008

Traditional IRA contribution and deduction limit. The contribution limit to your traditional IRA for 2008 will be increased to the smaller of the following amounts:

$5,000, or
Your taxable compensation for the year.

If you were age 50 or older before 2009, the most that can be contributed to your traditional IRA for 2008 will be the smaller of the following amounts:

$6,000, or
Your taxable compensation for the year.

For more information, see How Much Can Be Contributed? in this chapter.

Modified AGI limit for traditional IRA contributions increased. For 2008, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifying widow(er),
More than $53,000 but less than $63,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

For 2008, if you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your AGI is more than $159,000 but less than $169,000. If your AGI is $169,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? in this chapter.

Introduction

This chapter discusses the original IRA. In this publication the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA.” The following are two advantages of a traditional IRA:

You may be able to deduct some or all of your contributions to it, depending on your circumstances.
Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed.

What Is a Traditional IRA?

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

Who Can Set Up a Traditional 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 during the year, and
You were not age 70½ by the end of the year.

You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. See How Much Can You Deduct, later.

Both spouses have compensation

If both you and your spouse have compensation and are under age 70½, each of you can set up an IRA. You cannot both participate in the same IRA.

What Is Compensation?

Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes the items discussed next.

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, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes 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 the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

The deduction for contributions made on your behalf to retirement plans, and
The deduction allowed for one-half of your self-employment taxes.

Compensation includes earnings from self-employment even if they 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 includes both 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

For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.

Nontaxable combat pay

If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2007 Form W-2 with code Q. If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you can contribute more for those years than you already have, you can make additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions will be treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:

3 years from the date you filed your original return for the year for which you made the contribution,
2 years from the date you paid the tax due for the year for which you made the contribution, or
1 year from the date on which you made the contribution.

Table 1-1. Compensation for Purposes of an IRA

Includes ...	Does not include ...
	earnings and profits from property.
wages, salaries, etc.
	interest and dividend income.
commissions.
	pension or annuity income.
self-employment income.
	deferred compensation.
alimony and separate maintenance.
	income from certain partnerships.
nontaxable combat pay.
	any amounts you exclude from income.

What Is Not Compensation?

Compensation does not include any of the following items.

Earnings and profits from property, such as rental income, interest income, and dividend income.
Pension or annuity income.
Deferred compensation received (compensation payments postponed from a past year).
Income from a partnership for which you do not provide services that are a material income-producing factor.
Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.

When Can a Traditional IRA Be Set Up?

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

How Can a Traditional IRA Be Set Up?

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. The requirements for the various arrangements are discussed below.

Kinds of traditional IRAs

Your traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account.

Individual Retirement Account

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

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.
The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
Contributions, except for rollover contributions, must be in cash. See Rollovers, later.
You must have a nonforfeitable right to the amount at all times.
Money in your account cannot be used to buy a life insurance policy.
Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
You must start receiving distributions by April 1 of the year following the year in which you reach age 70½. See When Must You Withdraw Assets? (Required Minimum Distributions), later.

Individual Retirement Annuity

You can set up an individual retirement annuity by purchasing an annuity contract or an endowment contract from a life insurance company.

An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones who can receive the benefits or payments.

An individual retirement annuity must meet all the following requirements.

Your entire interest in the contract must be nonforfeitable.
The contract must provide that you cannot transfer any portion of it to any person other than the issuer.
There must be flexible premiums so that if your compensation changes, your payment can also change. This provision applies to contracts issued after November 6, 1978.
The contract must provide that contributions cannot be more than the deductible amount for an IRA for the year, and that you must use any refunded premiums to pay for future premiums or to buy more benefits before the end of the calendar year after the year in which you receive the refund.
Distributions must begin by April 1 of the year following the year in which you reach age 70½. See When Must You Withdraw Assets? (Required Minimum Distributions), later.

Individual Retirement Bonds

The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982. The bonds have the following features.

They stop earning interest when you reach age 70½. If you die, interest will stop 5 years after your death, or on the date you would have reached age 70½, whichever is earlier.
You cannot transfer the bonds.

If you cash (redeem) the bonds before the year in which you reach age 59½, you may be subject to a 10% additional tax. See Age 59½ Rule under Early Distributions, later. You can roll over redemption proceeds into IRAs.

Simplified Employee Pension (SEP)

A simplified employee pension (SEP) is a written arrangement that allows your employer to make deductible contributions to a traditional IRA (a SEP IRA) set up for you to receive such contributions. Generally, distributions from SEP IRAs are subject to the withdrawal and tax rules that apply to traditional IRAs. See Publication 560 for more information about SEPs.

Employer and Employee Association Trust Accounts

Your employer or your labor union or other employee association can set up a trust to provide individual retirement accounts for employees or members. The requirements for individual retirement accounts apply to these traditional IRAs.

Required Disclosures

The trustee or issuer (sometimes called the sponsor) of your traditional IRA generally must give you a disclosure statement at least 7 days before you set up your IRA. However, the sponsor does not have to give you the statement until the date you set up (or purchase, if earlier) your IRA, provided you are given at least 7 days from that date to revoke the IRA.

The disclosure statement must explain certain items in plain language. For example, the statement should explain when and how you can revoke the IRA, and include 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.

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 it was made by a trustee-to-trustee transfer) and the amount returned to you. These requirements apply to all sponsors.

How Much Can Be Contributed?

There are limits and other rules that affect the amount that can be contributed to a traditional IRA. These limits and rules are explained below.

Community property laws

Except as discussed later 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. Brokers' commissions. Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. For information about whether you can deduct brokers' commissions, see Brokers' commissions, later under How Much Can You Deduct. Trustees' fees. Trustees' administrative fees are not subject to the contribution limit. For information about whether you can deduct trustees' fees, see Trustees' fees, later under How Much Can You Deduct.

Qualified reservist repayments

If you were a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions (defined later under Early Distributions) you received. You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or a similar arrangement.

Limit

Your qualified reservist repayments cannot be more than your qualified reservist distributions, explained under Early Distributions, later.

When repayment contributions can be made

You cannot make these repayment contributions after the later of the following 2 dates.

The date that is 2 years after your active duty period ends.
August 17, 2008.

No deduction

You cannot deduct qualified reservist repayments.

Reserve component

The term “reserve component” means the:

Army National Guard of the United States,
Army Reserve,
Naval Reserve,
Marine Corps Reserve,
Air National Guard of the United States,
Air Force Reserve,
Coast Guard Reserve, or
Reserve Corps of the Public Health Service.

Figuring your IRA deduction

The repayment of qualified reservist distributions does not affect the amount you can deduct as an IRA contribution.

Reporting the repayment

If you repay a qualified reservist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606, Nondeductible IRAs.

Example

In 2007, your IRA contribution limit is $4,000. However, because of your filing status and AGI, the limit on the amount you can deduct is $3,500. You can make a nondeductible contribution of $500 ($4,000 - $3,500). In an earlier year you received a $3,000 qualified reservist distribution, which you would like to repay this year. For 2007, you can contribute a total of $7,000 to your IRA. This is made up of the maximum deductible contribution of $3,500; a nondeductible contribution of $500; and a $3,000 qualified reservist repayment. You contribute the maximum allowable for the year. Since you are making a nondeductible contribution ($500) and a qualified reservist repayment ($3,000) you must file Form 8606 with your return and include $3,500 ($500 + $3,000) on line 1 of Form 8606. The qualified reservist repayment is not deductible. Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. See chapter 2 for information about Roth IRAs.

General Limit

For 2007, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

$4,000 ($5,000 if you are age 50 or older), or
Your taxable compensation (defined earlier) for the year.

This general limit may be increased to $7,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies later.

Note.

This limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions).

This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. (See Nondeductible Contributions, later.) Qualified reservist repayments do not affect this limit.

Example —

George, who is 34 years old and single, earns $24,000 in 2007. His IRA contributions for 2007 are limited to $4,000.

Danny, an unmarried college student working part time, earns $3,500 in 2007. His IRA contributions for 2007 are limited to $3,500, the amount of his compensation.

More than one IRA

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

Annuity or endowment contracts

If you invest in an annuity or endowment contract under an individual retirement annuity, no more than $4,000 ($5,000 if you are age 50 or older) can be contributed toward its cost for the tax year, including the cost of life insurance coverage. If more than this amount is contributed, the annuity or endowment contract is disqualified. Catch-up contributions in certain employer bankruptcies. If you participated in a 401(k) plan and the employer who maintained the plan went into bankruptcy, you may be able to contribute an additional $3,000 to your IRA. For this to apply, the following conditions must be met.

You must have been a participant in a 401(k) plan under which the employer matched at least 50% of your contributions to the plan with stock of the company.
You must have been a participant in the 401(k) plan 6 months before the employer went into bankruptcy.
The employer (or a controlling corporation) must have been a debtor in a bankruptcy case in an earlier year.
The employer (or any other person) must have been subject to indictment or conviction based on business transactions related to the bankruptcy.

If you choose to make these catch-up contributions, the higher contribution and deduction limits for individuals who are age 50 or older do not apply. The most you can contribute to your IRA is the smaller of $7,000 or your taxable compensation for the year. Worksheet 1-2 and Worksheet 2 in Appendix B. If you qualify to make the catch-up contributions described above due to an employer bankruptcy, you must use the additional instructions below when completing Worksheet 1-2 or Worksheet 2 in Appendix B, shown later. On line 4 of the worksheet, use the percentage below that applies to you.

Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 35% (.35).
All others, multiply line 3 by 70% (.70).

On line 6 of the worksheet, enter contributions made, or to be made for 2007, but do not enter more than $7,000.

Spousal IRA Limit

For 2007, 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:

$4,000 ($5,000 if you are age 50 or older), or
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 contribution for the year to a traditional IRA.
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 $8,000 ($9,000 if only one of you is age 50 or older or $10,000 if both of you are age 50 or older).

This limit may be increased to $7,000 for each spouse who participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies earlier.

Note.

This traditional IRA limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions).

Example —

Kristin, a full-time student with no taxable compensation, marries Carl during the year. Neither was age 50 by the end of 2007. For the year, Carl has taxable compensation of $30,000. He plans to contribute (and deduct) $4,000 to a traditional IRA. If he and Kristin file a joint return, each can contribute $4,000 to a traditional IRA. This is because Kristin, who has no compensation, can add Carl's compensation, reduced by the amount of his IRA contribution, ($30,000 - $4,000 = $26,000) to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $4,000 is her contribution limit, because $4,000 is less than $26,000 (her compensation for purposes of figuring her contribution limit).

Filing Status

Generally, except as discussed earlier under Spousal IRA Limit, your filing status has no effect on the amount of allowable contributions to your traditional IRA. However, if during the year either you or your spouse was 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 You Deduct, later.

Example —

Tom and Darcy are married and both are 53. They both work and each has a traditional IRA. Tom earned $3,800 and Darcy earned $48,000 in 2007. Because of the spousal IRA limit rule, even though Tom earned less than $5,000, they can contribute up to $5,000 to his IRA for 2007 if they file a joint return. They can contribute up to $5,000 to Darcy's IRA. If they file separate returns, the amount that can be contributed to Tom's IRA is limited to $3,800.

Less Than Maximum Contributions

If contributions to your traditional IRA for a year were less than the limit, you cannot contribute more after the due date of your return for that year to make up the difference.

Example —

Rafael, who is 40, earns $30,000 in 2007. Although he can contribute up to $4,000 for 2007, he contributes only $2,000. After April 15, 2008, Rafael cannot make up the difference between his actual contributions for 2007 ($2,000) and his 2007 limit ($4,000). He cannot contribute $2,000 more than the limit for 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. However, a penalty or additional tax may apply. See Excess Contributions, later under What Acts Result in Penalties or Additional Taxes.

When Can Contributions Be Made?

As soon as you set up your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). Contributions must be in the form of money (cash, check, or money order). Property cannot be contributed. 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 in this chapter under Can You Move Retirement Plan Assets.

You can make a contribution to your IRA by having your income tax refund (or a portion of your refund), if any, paid directly to your traditional IRA, Roth IRA, or SEP IRA. For details see the instructions for your income tax return or Form 8888, Direct Deposit of Refund to More Than One Account.

Contributions can be made to your traditional IRA for each year that you receive compensation and have not reached age 70½. For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony, nontaxable combat pay or file a joint return with a spouse who has compensation. See Who Can Set Up a Traditional IRA, earlier. Even if contributions cannot be made for the current year, the amounts contributed for years in which you did qualify can remain in your IRA. Contributions can resume for any years that you qualify.

Contributions must be made by due date

Contributions can be made 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 2007 must be made by April 15, 2008, and contributions for 2008 must be made by April 15, 2009.

Nontaxable combat pay

If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you can contribute more for those years than you already have, you can make additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions will be treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:

3 years from the date you filed your original return for the year for which you made the contribution,
2 years from the date you paid the tax due for the year for which you made the contribution, or
1 year from the date on which you made the contribution.

Age 70½ rule. Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. You attain age 70½ on the date that is six calendar months after the 70th anniversary of your birth. If you were born on June 30, 1937, the 70th anniversary of your birth is June 30, 2007, and you attained age 70½ on December 30, 2007. If you were born on July 1, 1937, the 70th anniversary of your birth was July 1, 2007, and you attained age 70½ on January 1, 2008.

Designating year for which contribution is made

If an amount is contributed 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, and report to the IRS, that the contribution is for the current year (the year the sponsor received it).

Filing before a contribution is made

You can file your return claiming a traditional IRA contribution before the contribution is actually made. Generally, the contribution must be made by the due date of your return, not including extensions.

Contributions not required

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

How Much Can You Deduct?

Generally, you can deduct the lesser of:

The contributions to your traditional IRA for the year, or
The general limit (or the spousal IRA limit, if applicable) explained earlier under How Much Can Be Contributed.

However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. See Limit if Covered by Employer Plan, later.

You may be able to claim a credit for contributions to your traditional IRA. For more information, see chapter 5. Catch-up contributions. If the requirements listed earlier at Catch-up contributions in certain employer bankruptcies under How Much Can Be Contributed? are met and you choose to make those catch-up contributions, you cannot use the higher contribution and deduction limits for individuals who are age 50 or older. Trustees' fees. Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). For information about miscellaneous itemized deductions, see Publication 529, Miscellaneous Deductions. Brokers' commissions. These commissions are part of your IRA contribution and, as such, are deductible subject to the limits.

Full deduction

If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of:

$4,000 ($5,000 if you are age 50 or older), or
100% of your compensation.

This limit may be increased to $7,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies earlier. This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf.

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 lesser of:

$4,000 ($5,000 if the spouse with the lower compensation is age 50 or older), or
The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts.
1. The IRA deduction for the year of the spouse with the greater compensation.
2. Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation.
3. Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation.

This limit may be increased to $7,000 if the spouse with the lower compensation participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies earlier. This limit is reduced by any contributions to a section 501(c)(18) plan on behalf of the spouse with the lesser compensation.

Note.

If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. After a divorce or legal separation, you can deduct only the contributions to your own IRA. Your deductions are subject to the rules for single individuals.

Covered by an employer retirement plan

If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. This is discussed later under Limit if Covered by Employer Plan. Limits on the amount you can deduct do not affect the amount that can be contributed.

Are You Covered by an Employer Plan?

The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. The “Retirement Plan” box should be checked if you were covered.

Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered, later.

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

Federal judges

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

For Which Year(s) Are You Covered?

Special rules apply to determine the tax years for which you are covered by an employer plan. These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan.

Tax year

Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. For almost all people, the tax year is the calendar year.

Defined contribution plan

Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. However, also see Situations in Which You Are Not Covered, later. A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. In a defined contribution plan, the amount to be contributed to each participant's account is spelled out in the plan. The level of benefits actually provided to a participant depends on the total amount contributed to that participant's account and any earnings and losses on those contributions. 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 31, 2006. The contribution for the plan year ending on June 30, 2007, is made February 15, 2008. Because an amount is contributed to Bob's account for the plan year, Bob is covered by the plan for his 2007 tax year.

A special rule applies to certain plans in which it is not possible to determine if an amount will be contributed to your account for a given plan year. If, for a plan year, no amounts have been allocated to your account that are attributable to employer contributions, employee contributions, or forfeitures, by the last day of the plan year, and contributions are discretionary for the plan year, you are not covered for the tax year in which the plan year ends. If, after the plan year ends, the employer makes a contribution for that plan year, you are covered for the tax year in which the contribution is made.

Example —

Mickey was covered by a profit-sharing plan and left the company on December 31, 2006. The plan year runs from July 1 to June 30. Under the terms of the plan, employer contributions do not have to be made, but if they are made, they are contributed to the plan before the due date for filing the company's tax return. Such contributions are allocated as of the last day of the plan year, and allocations are made to the accounts of individuals who have any service during the plan year. As of June 30, 2007, no contributions were made that were allocated to the June 30, 2007 plan year, and no forfeitures had been allocated within the plan year. In addition, as of that date, the company was not obligated to make a contribution for such plan year and it was impossible to determine whether or not a contribution would be made for the plan year. On December 31, 2007, the company decided to contribute to the plan for the plan year ending June 30, 2007. That contribution was made on February 15, 2008. Mickey is an active participant in the plan for his 2008 tax year but not for his 2007 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 to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. This rule applies even if you:

Declined to participate in the plan,
Did not make a required contribution, or
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. In a defined benefit plan, the level of benefits to be provided to each participant is spelled out in the plan. The plan administrator figures the amount needed to provide those benefits and those amounts are contributed to the plan. Defined benefit plans include pension plans and annuity plans.

Example —

Nick, an employee of Company B, is eligible to participate in Company B's defined benefit plan, which has a July 1 to June 30 plan year. Nick leaves Company B on December 31, 2006. Because Nick is eligible to participate in the plan for its year ending June 30, 2007, he is covered by the plan for his 2007 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.

Situations in Which You Are Not Covered

Unless you are covered by another employer plan, you are not covered by an employer plan if you are in one of the situations described below.

Social security or railroad retirement

Coverage under social security or railroad retirement is not coverage under an employer retirement plan. Benefits from previous employer's plan. If you receive retirement benefits from a previous employer's plan, you are not covered by that 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 covered by the plan. You are not covered by the plan if both of the following conditions are met.

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.
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 covered by the plan. You are not covered by the plan if both of the following conditions are met.

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

Limit if Covered by Employer Plan

As discussed earlier, the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and by your filing status. Your deduction may also be affected by social security benefits you received.

Reduced or no deduction

If either you or your spouse was 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. These amounts vary depending on your filing status. To determine if your deduction is subject to the phaseout, you must determine your modified adjusted gross income (AGI) and your filing status, as explained later under Deduction Phaseout. Once you have determined your modified AGI and your filing status, you can use Table 1-2 or Table 1-3 to determine if the phaseout applies.

Social Security Recipients

Instead of using Table 1-2 or Table 1-3 and Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007, later, complete the worksheets in Appendix B of this publication if, for the year, all of the following apply.

You received social security benefits.
You received taxable compensation.
Contributions were made to your traditional IRA.
You or your spouse was covered by an employer retirement plan.

Use the worksheets in Appendix B to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. Appendix B includes an example with filled-in worksheets to assist you.

Table 1-2. Effect of Modified AGI ¹ on Deduction if You Are Covered by a Retirement Plan at Work

If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.

IF your filing status is ...	AND your modified adjusted gross income (modified AGI) is ...	THEN you can take ...
single or head of household	$52,000 or less	a full deduction.
	more than $52,000 but less than $62,000	a partial deduction.
	$62,000 or more	no deduction.
married filing jointly or qualifying widow(er)	$83,000 or less	a full deduction.
	more than $83,000 but less than $103,000	a partial deduction.
	$103,000 or more	no deduction.
married filing separately ²	less than $10,000	a partial deduction.
married filing separately ²	$10,000 or more	no deduction.

¹ Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later.
² If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status).

Table 1-3. Effect of Modified AGI ¹ on Deduction if You Are NOT Covered by a Retirement Plan at Work

If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.

IF your filing status is ...	AND your modified adjusted gross income (modified AGI) is ...	THEN you can take ...
single, head of household, or qualifying widow(er)	any amount	a full deduction.
married filing jointly or separately with a spouse who is not covered by a plan at work	any amount	a full deduction.
married filing jointly with a spouse who is covered by a plan at work	$156,000 or less	a full deduction.
	more than $156,000 but less than $166,000	a partial deduction.
	$166,000 or more	no deduction.
married filing separately with a spouse who is covered by a plan at work ²	less than $10,000	a partial deduction.
	$10,000 or more	no deduction.

¹ Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later.
² You are entitled to the full deduction if you did not live with your spouse at any time during the year.

For 2008, if you are not covered by a retirement plan at work and you are married filing jointly with a spouse who is covered by a plan at work, your deduction is phased out if your modified AGI is more than $159,000 but less than $169,000. If your AGI is $169,000 or more, you cannot take a deduction for a contribution to a traditional IRA.

Deduction Phaseout

The amount of any reduction in the limit on your IRA deduction (phaseout) depends on whether you or your spouse was covered by an employer retirement plan.

Covered by a retirement plan

If you are covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI, as shown in Table 1-2. For 2008, if you are covered by a retirement plan at work, your IRA deduction will not be reduced (phased out) unless your modified AGI is:

More than $53,000 but less than $63,000 for a single individual (or head of household),
More than $85,000 but less than $105,000 for a married couple filing a joint return (or a qualifying widow(er)), or
Less than $10,000 for a married individual filing a separate return.

If your spouse is covered

If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 1-3.

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. If you need more information on filing status, see Publication 501, Exemptions, Standard Deduction, and Filing Information.

Lived apart from spouse

If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. Modified adjusted gross income (AGI). You can use Worksheet 1-1 to figure your modified AGI. If you made contributions to your IRA for 2007 and received a distribution from your IRA in 2007, see Both contributions for 2007 and distributions in 2007, later. Do not assume that your modified AGI is the same as your compensation. Your modified AGI may include income in addition to your compensation such as interest, dividends, and income from IRA distributions.

Form 1040

If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Tuition and fees deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 (For Filers With Qualified Higher Education Expenses).
Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses.

This is your modified AGI.

Form 1040A

If you file Form 1040A, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Tuition and fees deduction.
Exclusion of qualified bond interest shown on Form 8815.

This is your modified AGI.

Form 1040NR

If you file Form 1040NR, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Domestic production activities deduction.
Exclusion of qualified savings bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.

This is your modified AGI.

Income from IRA distributions

If you received distributions in 2007 from one or more traditional IRAs and your traditional IRAs include only deductible contributions, the distributions are fully taxable and are included in your modified AGI.

Both contributions for 2007 and distributions in 2007

If all three of the following apply, any IRA distributions you received in 2007 may be partly tax free and partly taxable.

You received distributions in 2007 from one or more traditional IRAs,
You made contributions to a traditional IRA for 2007, and
Some of those contributions may be nondeductible contributions. (See Nondeductible Contributions and Worksheet 1-2, later.)

If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. To do this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution. If at least one of the above does not apply, figure your modified AGI using Worksheet 1-1.

How To Figure Your Reduced IRA Deduction

If you or your spouse is covered by an employer retirement plan and you did not receive any social security benefits, you can figure your reduced IRA deduction by using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007. The instructions for both Form 1040 and Form 1040A include similar worksheets that you can use instead of the worksheet in this publication. If you file Form 1040NR, use the worksheet in this publication.

If you or your spouse is covered by an employer retirement plan, and you received any social security benefits, see Social Security Recipients, earlier.

Note.

If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.

Worksheet 1-1. Figuring Your Modified AGI Use this worksheet to figure your modified AGI for traditional IRA purposes.

1.	Enter your adjusted gross income (AGI) from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 36	1.
2.	Enter any traditional IRA deduction from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 31	2.
3.	Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 32	3.
4.	Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19	4.
5.	Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 33	5.
6.	Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18	6.
7.	Enter any foreign housing deduction from Form 2555, line 50	7.
8.	Enter any excludable savings bond interest from Form 8815, line 14	8.
9.	Enter any excluded employer-provided adoption benefits from Form 8839, line 30	9.
10.	Add lines 1 through 9. This is your Modified AGI for traditional IRA purposes	10.

Reporting Deductible Contributions

If you file Form 1040, enter your IRA deduction on line 32 of that form. If you file Form 1040A, enter your IRA deduction on line 17 of that form. If you file Form 1040NR, enter your IRA deduction on line 31 of that form. You cannot deduct IRA contributions on Form 1040EZ or Form 1040NR-EZ.

Self-employed. If you are self-employed (a sole proprietor or partner) and have a SIMPLE IRA, enter your deduction for allowable plan contributions on Form 1040, line 28. If you file Form 1040NR, enter your deduction on line 27 of that form.

Nondeductible Contributions

Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA of up to the general limit or, if it applies, the spousal IRA limit. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution.

Example —

Tony is 29 years old and single. In 2007, he was covered by a retirement plan at work. His salary is $57,312. His modified adjusted gross income (modified AGI) is $65,000. Tony makes a $4,000 IRA contribution for 2007. Because he was covered by a retirement plan and his modified AGI is above $62,000, he cannot deduct his $4,000 IRA contribution. He must designate this contribution as a nondeductible contribution by reporting it on Form 8606.

Repayment of reservist and hurricane distributions

Nondeductible contributions may include repayments of qualified reservist and qualified hurricane distributions. For more information, see Qualified reservist repayments under How Much Can Be Contributed? earlier and Repayment of Qualified Hurricane Distributions in chapter 4.

Form 8606

To designate contributions as nondeductible, you must file Form 8606. (See the filled-in Forms 8606 in this chapter.) You do not have to designate a contribution as nondeductible until you file your tax return. When you file, you can even designate otherwise deductible contributions as nondeductible contributions. You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year.

Failure to report nondeductible contributions

If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible. All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made.

Penalty for overstatement

If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause.

Penalty for failure to file Form 8606

You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause.

Tax on earnings on nondeductible contributions

As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed.

Cost basis

You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Commonly, distributions from your traditional IRAs will include both taxable and nontaxable (cost basis) amounts. See Are Distributions Taxable, later, for more information. Recordkeeping. There is a recordkeeping worksheet, Appendix A, Summary Record of Traditional IRA(s) for 2007, that you can use to keep a record of deductible and nondeductible IRA contributions.

Examples — Worksheet for Reduced IRA Deduction for 2007

The following examples illustrate the use of Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007.

Example —

For 2007, Tom and Betty file a joint return on Form 1040. They are both 39 years old. They are both employed and Tom is covered by his employer's retirement plan. Tom's salary is $57,000 and Betty's is $30,555. They each have a traditional IRA and their combined modified AGI, which includes $2,000 interest and dividend income, is $89,555. Because their modified AGI is between $83,000 and $103,000 and Tom is covered by an employer plan, Tom is subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan.

For 2007, Tom contributed $4,000 to his IRA and Betty contributed $4,000 to hers. Even though they file a joint return, they must use separate worksheets to figure the IRA deduction for each of them.

Tom can take a deduction of only $2,690.

He can choose to treat the $2,690 as either deductible or nondeductible contributions. He can either leave the $1,310 ($4,000 - $2,690) of nondeductible contributions in his IRA or withdraw them by April 15, 2008. He decides to treat the $2,690 as deductible contributions and leave the $1,310 of nondeductible contributions in his IRA.

Using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007—Example 1 Illustrated.

Betty figures her IRA deduction as follows. Betty can treat all or part of her contributions as either deductible or nondeductible. This is because her $4,000 contribution for 2007 is not subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan. She does not need to use Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007, because their modified AGI is not within the phaseout range that applies. Betty decides to treat her $4,000 IRA contributions as deductible.

The IRA deductions of $2,690 and $4,000 on the joint return for Tom and Betty total $6,690.

Example —

For 2007, Ed and Sue file a joint return on Form 1040. They are both 39 years old. Ed is covered by his employer's retirement plan. Ed's salary is $40,000. Sue had no compensation for the year and did not contribute to an IRA. Sue is not covered by an employer plan. Ed contributed $4,000 to his traditional IRA and $4,000 to a traditional IRA for Sue (a spousal IRA). Their combined modified AGI, which includes $2,000 interest and dividend income and a large capital gain from the sale of stock, is $156,555.

Because the combined modified AGI is $103,000 or more, Ed cannot deduct any of the contribution to his traditional IRA. He can either leave the $4,000 of nondeductible contributions in his IRA or withdraw them by April 15, 2008.

Sue figures her IRA deduction as shown on Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2007—Example 2 Illustrated.

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2007

(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.)
Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.
Certain employer bankruptcies. See Catch-up contributions in certain employer bankruptcies earlier, for instructions to complete lines 4 and 6 of this worksheet.

IF you ...		AND your filing status is ...	AND your modified AGI is over ...	THEN enter on line 1 below ...
are covered by an employer plan		single or head of household	$52,000	$62,000
		married filing jointly or qualifying widow(er)	$83,000	$103,000
		married filing separately	$0	$10,000
are not covered by an employer plan, but your spouse is covered		married filing jointly	$156,000	$166,000
		married filing separately	$0	$10,000
1.	Enter applicable amount from table above				1.
2.	Enter your modified AGI (that of both spouses, if married filing jointly)				2.
	Note. If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions are not deductible. See Nondeductible Contributions.
3.	Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $4,000 ($5,000 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less				3.
4.	Multiply line 3 by the percentage below that applies to you. If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.
	Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 20% (.20) (by 25% (.25) if you are age 50 or older). All others, multiply line 3 by 40% (.40) (by 50% (.50) if you are age 50 or older).				4.
5.	Enter your compensation minus any deductions on Form 1040, line 27 (one-half of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans); or on Form 1040NR, line 27 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment				5.
6.	Enter contributions made, or to be made, to your IRA for 2007 but do not enter more than $4,000 ($5,000 if you are age 50 or older). If contributions are more than $4,000 ($5,000 if you are age 50 or older), see Excess Contributions, later.				6.
7.	IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8				7.
8.	Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606				8.

What if You Inherit an IRA?

If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive.

Inherited from spouse

If you inherit a traditional IRA from your spouse, you generally have the following three choices. You can:

Treat it as your own IRA by designating yourself as the account owner.
Treat it as your own by rolling it over into your traditional IRA, or to the extent it is taxable, into a:
1. Qualified employer plan,
2. Qualified employee annuity plan (section 403(a) plan),
3. Tax-sheltered annuity plan (section 403(b) plan),
4. Deferred compensation plan of a state or local government (section 457 plan), or
Treat yourself as the beneficiary rather than treating the IRA as your own.

Treating it as your own

You will be considered to have chosen to treat the IRA as your own if:

Contributions (including rollover contributions) are made to the inherited IRA, or
You do not take the required minimum distribution for a year as a beneficiary of the IRA.

You will only be considered to have chosen to treat the IRA as your own if:

You are the sole beneficiary of the IRA, and
You have an unlimited right to withdraw amounts from it.

However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. For more information, see When Must You Withdraw Assets? (Required Minimum Distributions), later.

Inherited from someone other than spouse

If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

IRA with basis

If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

Federal estate tax deduction

A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. The beneficiary can deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year the income is reported. For information on claiming this deduction, see Estate Tax Deduction under Other Tax Information in Publication 559, Survivors, Executors, and Administrators. Any taxable part of a distribution that is not income in respect of a decedent is a payment the beneficiary must include in income. However, the beneficiary cannot take any estate tax deduction for this part. A surviving spouse can roll over the distribution to another traditional IRA and avoid including it in income for the year received.

More information

For more information about rollovers, required distributions, and inherited IRAs, see:

Rollovers, later under Can You Move Retirement Plan Assets,
When Must You Withdraw Assets? (Required Minimum Distributions), later, and
The discussion of IRA beneficiaries later under When Must You Withdraw Assets? (Required Minimum Distributions).

Can You Move Retirement Plan Assets?

You can transfer, tax free, assets (money or property) from other retirement programs (including traditional IRAs) to a traditional IRA. You can make the following kinds of transfers.

Transfers from one trustee to another.
Rollovers.
Transfers incident to a divorce.

This chapter discusses all three kinds of transfers.

Transfers to Roth IRAs

Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. For more information about these transfers, see Converting From Any Traditional IRA Into a Roth IRA, later, and Can You Move Amounts Into a Roth IRA? in chapter 2.

Transfers to Roth IRAs from other retirement plans

For 2008, under certain conditions, you can move assets from an eligible retirement plan to a Roth IRA. For more information, see Can You Move Amounts Into a Roth IRA? in chapter 2.

Trustee-to-Trustee Transfer

A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers. This waiting period is discussed later under Rollover From One IRA Into Another.

For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option, later.

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.”

Note.

An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan.

Kinds of rollovers to a traditional IRA

You can roll over amounts from the following plans into a traditional IRA:

A traditional IRA,
An employer's qualified retirement plan for its employees,
A deferred compensation plan of a state or local government (section 457 plan), or
A tax-sheltered annuity plan (section 403 plan).

Treatment of rollovers

You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and Reporting rollovers from employer plans.

Rollover notice

A written explanation of rollover treatment must be given to you by the plan (other than an IRA) making the distribution.

Kinds of rollovers from a traditional IRA

You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA

Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

Eligible retirement plans

The following are considered eligible retirement plans.

Individual retirement arrangements (IRAs).
Qualified trusts.
Qualified employee annuity plans under section 403(a).
Deferred compensation plans of state and local governments (section 457 plans).
Tax-sheltered annuities (section 403(b) annuities).

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2007—Example 1 Illustrated

(Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.)
Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately.
Certain employer bankruptcies. See Catch-up contributions in certain employer bankruptcies earlier, for instructions to complete lines 4 and 6 of this worksheet.

IF you ...		AND your filing status is ...	AND your modified AGI is over ...	THEN enter on line 1 below ...
are covered by an employer plan		single or head of household	$52,000	$62,000
		married filing jointly or qualifying widow(er)	$83,000	$103,000
		married filing separately	$0	$10,000
are not covered by an employer plan, but your spouse is covered		married filing jointly	$156,000	$166,000
		married filing separately	$0	$10,000
1.	Enter applicable amount from table above				1.	103,000
2.	Enter your modified AGI (that of both spouses, if married filing jointly)				2.	89,555
	Note. If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions are not deductible. See Nondeductible Contributions.
3.	Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $4,000 ($5,000 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less				3.	13,445
4.	Multiply line 3 by the percentage below that applies to you. If the result is not a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200.
	Married filing jointly or qualifying widow(er) and you are covered by an employer

Individual Retirement Arrangements (IRAs), Publication 590 (2007)