us internal revenue service: p590--1999

8/14/2019 US Internal Revenue Service: p590--1999

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Contents

Introduction ........................................................ 2

1. Traditional IRAs ............................................. 3

What Is a Traditional IRA? .............................. 3

Who Can Set Up a Traditional IRA? ............... 3

When and How Can a Traditional IRA Be Set

Up? ........................................................... 4How Much Can Be Contributed? ..................... 5

How Much Can I Deduct? ............................... 7

Can I Move Retirement Plan Assets? ............. 14

When Can I Withdraw or Use IRA Assets? .... 19

Are Distributions Taxable? .............................. 26

What Acts Result in Penalties? ....................... 31

2. Roth IRAs ........................................................ 36

What Is a Roth IRA? ....................................... 36

Can I Contribute to a Roth IRA? ..................... 36

Can I Move Amounts Into a Roth IRA? .......... 38

Are Distributions From My Roth IRA Taxable? 42

3. Education IRAs .............................................. 45

What Is an Education IRA? ............................. 45

Who Can Contribute to an Education IRA? .... 46

Can Education IRA Assets Be Moved? .......... 48

Are Withdrawals Taxable? ............................... 48

4. Simplified Employee Pension (SEP) ............ 50

What Is a SEP? ............................................... 50

How Much Can Be Contributed on My Behalf? 51

Salary Reduction Arrangement ....................... 53

When Can I Withdraw or Use Assets? ........... 53

5. Savings Incentive Match Plans forEmployees (SIMPLE) .................................. 53

What Is a SIMPLE Plan? ................................. 54

How Are Contributions Made? ........................ 54

How Much Can Be Contributed on My Behalf? 55

When Can I Withdraw or Use Assets? ........... 56

6. How To Get More Information ...................... 56

Appendices ......................................................... 58

Appendix A. Summary Record of TraditionalIRA(s) for 1999 and Worksheet for

Determining Required AnnualDistributions .............................................. 59

Appendix B. Worksheets for Social SecurityRecipients Who Contribute to an IRA ...... 60

Appendix C. Filled-in Forms 5329 ................... 70

Appendix D. Filled-in Forms 8606 ................... 72

Appendix E. Life Expectancy and ApplicableDivisor Tables ........................................... 74

Appendix F. IRAs Contribution/DistributionQuick Reference Chart ............................. 80

Index .................................................................... 81

Department of the TreasuryInternal Revenue Service

Publication 59 0Cat. No. 15160x

IndividualRetirementArrangements(IRAs)(Inc luding Roth IRAsand Educa tion IRAs)

For use in preparing

1999 Returns


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Important Changes

Modified AGI limit increased. For 1999, if you arecovered by a retirement plan at work, your deductionfor contributions to a traditional IRA will not be reduced(phased out) unless your modified adjusted gross in-come (AGI) is between:

$51,000 and $61,000 for a married couple or aqualifying widow(er) filing a joint return,

$31,000 and $41,000 for a single individual or headof household, or

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

See How Much Can I Deduct?in chapter 1.

Photographs of missing children. The Internal Rev-enue Service is a proud partner with the National Cen-ter for Missing and Exploited Children. Photographs ofmissing children selected by the Center may appear inthis publication on pages that would otherwise be blank.

You can help bring these children home by looking atthe photographs and calling 1800THELOST(18008435678) if you recognize a child.

Important Reminders

Traditional IRA defined. A traditional IRA is any IRAthat is not a Roth, SIMPLE, or education IRA.

Interest earned. Although interest earned from yourIRA is generally not taxed in the year earned, it is nottax-exemptinterest. Do notreport this interest on your

return as tax-exempt interest.

Penalty for failure to file Form 8606. If you makenondeductible contributions to a traditional IRA and youdo not file Form 8606, Nondeductible IRAs, with yourtax return, you may have to pay a $50 penalty.

Contributions to spousal IRAs. In the case of amarried couple filing a joint return, up to $2,000 can becontributed to IRAs (other than SIMPLE and educationIRAs) on behalf of each spouse, even if one spousehas little or no compensation. This means that the totalcombined contributions that can be made on behalf ofa married couple can be as much as $4,000 for the

year. See Spousal IRA limitunder How Much Can BeContributed? in chapter 1. Employer contributions un-der a SEP plan are not counted when figuring the limits

just discussed.

Spouse covered by employer plan. If you are notcovered by an employer retirement plan and you file a

joint return, you may be able to deduct all of your con-tributions to a traditional IRA even if your spouse iscovered by a plan. In this case, your deduction is limitedto $2,000 and must be reduced if your modified ad-

justed gross income (AGI) on a joint return is more than$150,000. You cannot deduct any of your contributions

if the modified AGI on your joint return is $160,000 ormore.

See How Much Can I Deduct?in chapter 1.

No additional tax on early withdrawals for highereducation expenses. You can take distributions fromyour traditional IRA for qualified higher education ex-penses without having to pay the 10% additional taxon early withdrawals.

For more information, see Higher education ex-

pensesunder Age 591/2 Rulein chapter 1.

No additional tax on early withdrawals for firsthome. You can take distributions of up to $10,000 fromyour traditional or Roth IRA to buy, build, or rebuild afirst home without having to pay the 10% additional taxon early withdrawals.

For traditional IRAs, see First home, under Age591/2 Rule in chapter 1. For Roth IRAs, see What AreQualified Distributions?in chapter 2.

Roth IRA. You may be able to establish and contributeto a nondeductible tax-free individual retirement ar-

rangement (a plan) called a Roth IRA. You cannot claima deduction for any contributions to a Roth IRA. But, ifyou satisfy the requirements, all earnings are tax freeand neither your nondeductible contributions nor anyearnings on them are taxable when you withdraw them.See chapter 2.

Education IRA. You may be able to make non-deductible contributions of up to $500 annually to aneducation IRA for a child under age 18. Earnings in theIRA accumulate free of income tax. See chapter 3.

IntroductionAn individual retirement arrangement (IRA) is a per-sonal savings plan that offers you tax advantages toset aside money for your retirement or, in some plans,for certain education expenses. Two advantages of anIRA are:

1) You may be able to deduct your contributions inwhole or in part, depending on the type of IRA andyour circumstances, and

2) Generally, amounts in your IRA, including earningsand gains, are not taxed until distributed, or, insome cases, are not taxed at all if distributed ac-cording to the rules.

Chapter 1 discusses the rules for traditional IRAs(those that are not Roth, SIMPLE, or education IRAs).Chapter 2 discusses the Roth IRA, which featuresnondeductible contributions and tax-free withdrawals.Chapter 3 discusses the education IRA, which can beset up to finance higher education expenses. Chapter4 discusses simplified employee pensions (SEPs), un-der which IRAs can be set up to receive contributionsfrom employers under SEP plans. Chapter 5 discussesSIMPLE IRAs, which are IRAs set up to receive em-ployer contributions under a savings incentive matchplan for employees (SIMPLE).

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This publication explains the rules for setting up anIRA, contributing to it, transferring money or propertyto and from it, and making withdrawals from it. Penaltiesfor breaking the rules are also explained. Worksheets,sample forms, and tables, listed under Appendices inthe contents, are included to help you comply with therules. These appendices are at the back of this publi-cation.

Useful ItemsYou may want to see:

Publications

560 Retirement Plans for Small Business (In-cluding SEP, SIMPLE, and Keogh Plans)

571 Tax-Sheltered Annuity Programs for Em-ployees of Public Schools and Certain Tax-Exempt Organizations

575 Pension and Annuity Income

939 General Rule for Pensions and Annuities

Forms (and instructions)

W4P Withholding Certificate for Pension or Annu-ity Payments

1099R Distributions From Pensions, Annuities,Retirement or Profit-Sharing Plans, IRAs,Insurance Contracts, etc.

5304SIMPLE Savings Incentive Match Plan forEmployees of Small Employers (SIMPLE)(Not Subject to the Designated Financial In-stitution Rules)

5305SEP Simplified Employee Pension-Individual

Retirement Accounts Contribution Agree-ment

5305ASEP Salary Reduction and Other ElectiveSimplified Employee PensionIndividualRetirement Accounts Contribution Agree-ment

5305S SIMPLE Individual Retirement Trust Ac-count

5305SA SIMPLE Individual Retirement CustodialAccount

5305SIMPLE Savings Incentive Match Plan forEmployees of Small Employers (SIMPLE)

5329 Additional Taxes Attributable to IRAs, OtherQualified Retirement Plans, Annuities, Mod-ified Endowment Contracts, and MSAs

5498 IRA Contribution Information

8606 Nondeductible IRAs

8815 Exclusion of Interest From Series EE and IU.S. Savings Bonds Issued After 1989 (ForFilers With Qualified Higher Education Ex-penses)

8839 Qualified Adoption Expenses

See chapter 6 for information about getting thesepublications and forms.

1.

Traditional IRAsThis chapter discusses the original IRA. In this pub-

lication the original IRA (sometimes called an ordinaryor regular IRA) is referred to as the traditional IRA.Two advantages of a traditional IRA are that you maybe able to deduct some or all of your contributions toit, depending on your circumstances, and, generally,amounts in your IRA, including earnings and gains, arenot taxed until they are distributed.

What Is a Traditional IRA?A traditional IRA is any IRA that is not a Roth IRA, aSIMPLE IRA, or an education IRA.

Who Can Set Up a TraditionalIRA?You can set up and make contributions to a traditionalIRA if you (or, if you file a joint return, your spouse)received taxable compensation during the year andyou were not age 701/2 by the end of the year.

You can have a traditional IRA whether or not you

covered by any other retirement plan. However, youmay not be able to deduct all of the contributions if youor your spouse are covered by an employer retirementplan. See How Much Can I Deduct?later.

What Is Compensation?As stated earlier, to set up and contribute to a traditionalIRA, you or your spouse must have received taxablecompensation. This rule applies to both deductible andnondeductible contributions. Generally, what you earnfrom working is compensation.

Compensation includes the items discussed next.

Wages, salaries, etc. Wages, salaries, tips, profes-sional fees, bonuses, and other amounts you receivefor providing personal services are compensation. TheIRS treats as compensation any amount properlyshown in box 1 (Wages, tips, other compensation) ofForm W2, Wage and Tax Statement, provided thatamount is reduced by any amount properly shown inbox 11 (Nonqualified plans). Scholarship and fellowshippayments are compensation for this purpose only ifshown in box 1 of Form W2.

Commissions. An amount you receive that is a per-centage of profits or sales price is compensation.

Chapter 1 Traditional IRAs Page 3


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Self-employment income. If you are self-employed(a sole proprietor or a partner), compensation is the netearnings from your trade or business (provided yourpersonal services are a material income-producingfactor), reduced by the deduction for contributions madeon your behalf to retirement plans and the deductionallowed for one-half of your self-employment taxes.

Compensation includes earnings from self-employ-ment even if they are not subject to self-employment taxbecause of your religious beliefs. See Publication 533,

Self-Employment Tax, for more information.When you have both self-employment income and

salaries and wages, your compensation includes bothamounts.

Self-employment loss. If you have a net loss fromself-employment, do not subtract the loss from yoursalaries or wages when figuring your total compen-sation.

Alimony and separate maintenance. Treat as com-pensation any taxable alimony and separate mainte-nance payments you receive under a decree of divorceor separate maintenance.

What Is Not Compensation?Compensation does notinclude any of the following

items.

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

Pension or annuity income.

Deferred compensation received (compensationpayments postponed from a past year).

Income from a partnership for which you do notprovide services that are a material income-

producing factor.

Any amounts you exclude from income, such asforeign earned income and housing costs.

When and How Can aTraditional 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 I Make Contributions?, later.

You can set up different kinds of IRAs with a varietyof organizations. You can set up an IRA at a bank orother financial institution or with a mutual fund or lifeinsurance company. You can also set up an IRAthrough your stockbroker. Any IRA must meet InternalRevenue Code requirements. The requirements for thevarious arrangements are discussed below.

Kinds of traditional IRAs. Your traditional IRA can bean individual retirement account or annuity. It can bepart of either a simplified employee pension (SEP) ora part of an employer or employee association trustaccount.

Individual Retirement AccountAn individual retirement account is a trust or custodialaccount set up in the United States for the exclusivebenefit of you or your beneficiaries. The account iscreated by a written document. The document mustshow that the account meets all of the following re-quirements.

1) The trustee or custodian must be a bank, a federallyinsured credit union, a savings and loan associ-ation, or an entity approved by the IRS to act astrustee or custodian.

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

3) Contributions, except for rollover contributions,must be in 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 lifeinsurance policy.

6) Assets in your account cannot be combined withother property, except in a common trust fund orcommon investment fund.

7) You must start receiving distributions by April 1 ofthe year following the year in which you reach age701/2. See When Must I Withdraw IRA Assets?(Required Distributions), later.

Individual Retirement Annuity

You can set up an individual retirement annuity bypurchasing an annuity contract or an endowment con-tract from a life insurance company.

An individual retirement annuity must be issued inyour name as the owner, and either you or your ben-eficiaries who survive you are the only ones who canreceive the benefits or payments.

An individual retirement annuity must meet all thefollowing requirements.

1) Your entire interest in the contract must benonforfeitable.

2) The contract must provide that you cannot transferany portion of it to any person other than the issuer.

3) There must be flexible premiums so that if yourcompensation changes, your payment can alsochange. This provision applies to contracts issuedafter November 6, 1978.

4) The contract must provide that contributions cannotbe more than $2,000 in any year, and that you mustuse any refunded premiums to pay for future pre-miums or to buy more benefits before the end of thecalendar year after the year you receive the refund.

5) Distributions must begin by April 1 of the year fol-lowing the year in which you reach age 701/2. See

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When Must I Withdraw IRA Assets? (RequiredDistributions), later.

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

1) You are paid interest on them only when you cashthem in.

2) You are not paid any further interest after you reachage 701/2. If you die, interest will stop 5 years afteryour death, or on the date you would have reachedage 701/2, whichever is earlier.

3) You cannot transfer the bonds.

If you cash (redeem) the bonds before the year in whichyou reach age 591/2, you may be subject to a 10% ad-ditional tax. See Premature Distributions (Early With-drawals), later. You can roll over redemption proceedsinto IRAs.

Employer and EmployeeAssociation Trust AccountsYour employer, labor union, or other employee associ-ation can set up a trust to provide individual retirementaccounts for its employees or members. The require-ments for individual retirement accounts apply to theseemployer or union-established traditional IRAs.

Simplified Employee Pension (SEP)A simplified employee pension (SEP) is a written ar-rangement that allows your employer to make deduct-ible contributions to a traditional IRA (a SEP-IRA) setup for you to receive such contributions. See chapter

4 for more information.

Inherited IRAsIf you inherit a traditional IRA, that IRA becomes subjectto special rules.

A traditional IRA is included in the estate of the de-cedent who owned it.

Unless you are the decedent's surviving spouse, youcannot treat an inherited traditional IRA as your own.This means that unless you are the surviving spouse,contributions (including rollover contributions) cannotbe made to the IRA and you cannot roll it over. But, likethe 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 yourown. You will be treated as having made this electionif:

Contributions (including rollover contributions) aremade to the inherited IRA, or

Required distributions are not made from it.

For more information, see the discussions of inher-ited IRAs later in this chapter under Rollovers, underBeneficiaries, and under Are Distributions Taxable?.

Required DisclosuresThe trustee or issuer (sometimes called the sponsor)of the traditional IRA generally must give you a disclo-sure statement at least 7 days before you set up yourIRA. However, the sponsor does not have to give youthe statement until the date you set up (or purchase, ifearlier) your IRA, provided you are given at least 7 daysfrom that date to revoke the IRA.

If you revoke your IRA within the revocation period,

the sponsor must return to you the entire amount youpaid. The sponsor must report on the appropriate IRSforms both your contribution to the IRA (unless by atrustee-to-trustee transfer) and the distribution to youupon your revocation of the IRA. These requirementsapply to all sponsors.

Generally, the sponsor is the bank that is the trusteeof the account or the insurance company that issued theannuity contract.

Disclosure statement. The disclosure statementgiven to you by the plan sponsor must explain certainitems in plain language. For example, the statementshould explain when and how you can revoke the IRA,and include the name, address, and telephone numberof the person to receive the notice of cancellation. Thisexplanation must appear at the beginning of the dis-closure statement.

How Much Can BeContributed?As soon as you set up your traditional IRA, contributionscan be made to it through your chosen sponsor (trusteeor other administrator). Contributions must be in the

form of money(cash, check or money order). Propertycannot be contributed. However, you may be able totransfer or roll over certain property from one retirementplan to another. See the discussion of rollovers andother transfers later in this chapter.

Contributions can be made to your traditional IRA foreach year that you have received compensation andhave not reached age 701/2 during the year. For anyyear in which you do not work, contributions cannot bemade to your IRA unless you receive alimony or file a

joint return with a spouse who has compensation. SeeWho Can Set Up a Traditional IRA?, earlier. Even ifcontributions can not be made for the current year, theamounts contributed for years in which you did qualify

can remain in your IRA. Contributions can resume forany years that you qualify.

Limits and Other RulesThere are limits and other rules that affect the amountthat can be contributed. These limits and rules are ex-plained below.

General limit. The most that can be contributed forany year to your traditional IRA is the smaller of thefollowing amounts:



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Your compensation (defined earlier ) that you mustinclude in income for the year, or

$2,000.

Note. This limit is reduced by any contributions toa section 501(c)(18) plan (generally, a pension plancreated before June 25, 1959, that is funded entirelyby employee contributions).

This is the most that can be contributed regardlessof whether the contributions are to one or more tradi-tional IRAs or whether all or part of the contributionsare nondeductible (see Nondeductible Contributions,later).

CAUTION

!Contributions on your behalf to a traditional IRAreduce your limit for contributions to a Roth IRA(see chapter 2).

Examples. George, who is single, earns $24,000 in1999. His IRA contributions for 1999 are limited to$2,000.

Danny, a college student working part time, earns

$1,500 in 1999. His IRA contributions for 1999 are lim-ited to $1,500, the amount of his compensation.

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

1) $2,000, or

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

a) Your spouse's IRA contribution for the year.

b) Any contributions for the year to a Roth IRA onbehalf of your spouse.

This means that the total combined contributions thatcan be made for the year to your IRA and your spouse'sIRA can be as much as $4,000.

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

CAUTION!

Contributions to traditional IRAs reduce the limit

for contributions to Roth IRAs (see chapter 2).

Example. Christine, a full-time student with no tax-able compensation, marries Jeremy during the year.For the year, Jeremy has taxable compensation of$30,000. He plans to contribute (and deduct) $2,000 toa traditional IRA. If he and Christine file a joint return,each can contribute $2,000 for the year to a traditionalIRA. This is because Christine, who has no compen-sation, can add Jeremy's compensation, reduced by theamount of his IRA contribution, ($30,000 $2,000 =$28,000) to her own compensation (0) to figure hermaximum contribution to a traditional IRA. In her case,

$2,000 is her contribution limit, because $2,000 is lessthan $28,000 (her compensation for purposes of figur-ing her contribution limit).

Age 701/2 rule. Contributions cannot be made to yourtraditional IRA for the year you reach age 701/2 or anylater year.

Community property laws. Except as just discussed

under Spousal IRA limit, each spouse figures his or herlimit separately, using his or her own compensation.This is the rule even in states with community propertylaws.

Filing status. Generally, except as discussed earlierunder Spousal IRA limit, your filing status has no effecton the amount of allowable contributions to your tradi-tional IRA. However, if during the year either you oryour spouse was covered by a retirement plan at work,your deduction may be reduced or eliminated, de-pending on your filing status and income. See HowMuch Can I Deduct?, later.

Example. Tom and Rosa are married and both areunder age 701/2. They both work and each has a tradi-tional IRA. Tom earned $1,800 and Rosa earned$48,000 in 1999. Even though Tom earned less than$2,000, they can contribute up to $2,000 to his IRA forthe year, under the spousal IRA limit rule, if they file a

joint return. They can contribute up to $2,000 to Rosa'sIRA. If they file separate returns, the amount that canbe contributed to Tom's IRA is limited to $1,800.

Contributions not required. You do not have to con-tribute to your traditional IRA for every tax year, evenif you can.

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

Example. Justin earns $30,000 in 1999. Althoughhe can contribute up to $2,000 for 1999, he contributesonly $1,000. Justin cannot make up the $1,000 ($2,000 $1,000) difference between his actual contributionsfor 1999 and his 1999 limit by contributing $1,000 morethan the limit in 2000 or any later year.

More than maximum contributions. If contributions

to your IRA for a year were more than the limit, you canapply the excess contribution in one year to a later yearif the contributions for that later year are less than themaximum allowed for that year. See Excess Contribu-tions, later.

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

CAUTION

!The limit for contributions to Roth IRAs (seechapter 2) is reduced by contributions made onyour behalf to your traditional IRAs.



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Both spouses have compensation. If both you andyour spouse have compensation and are under age701/2, each of you can set up an IRA. You cannot bothparticipate in the same IRA.

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

If, however, you inherit a traditional IRA and you arenot the decedent's spouse, you cannot contribute to that

IRA, because you cannot treat it as your own.

Annuity or endowment contracts. If you invest in anannuity or endowment contract under an individual re-tirement annuity, no more than $2,000 can be contrib-uted toward its cost for the tax year, including the costof life insurance coverage. If more than $2,000 is con-tributed, the annuity or endowment contract is disqual-ified.

Brokers' commissions. Brokers' commissions paid inconnection with your traditional IRA are subject tothecontribution limit and are not deductibleas a miscel-laneous deduction on Schedule A (Form 1040).

Trustees' fees. Trustees' administrative fees are notsubject to the contribution limit. A trustee's adminis-trative fees that are billed separately and paid in con-nection with your traditional IRA are deductible. Theyare deductible (if they are ordinary and necessary) asa miscellaneous deduction on Schedule A (Form 1040).The deduction is subject to the 2%-of-adjusted-gross-income limit.

When Can Contributions Be Made?Contributions can be made to your traditional IRA fora year at any time during the year or by the due date

for filing your return for that year, not including exten-sions. For most people, this means that contributionsfor 1999 must be made by April 17, 2000.

Designating year for which contribution is made.If an amount is contributed to your traditional IRA be-tween January 1 and April 17, you should tell thesponsor which year (the current year or the previousyear) the contribution is for. If you do not tell the spon-sor which year it is for, the sponsor can assume, forreporting to the IRS, that the contribution is for thecurrent year (the year the sponsor received it).

Filing before a contribution is made. You can file

your return claiming a traditional IRA contribution beforethe contribution is actually made. However, the contri-bution must be made by the due date of your return,notincluding extensions.

How Much Can I Deduct?Generally, you can deduct the lesser of the contribu-tions to your traditional IRA for the year or the generallimit (or spousal IRA limit, if applicable). However, ifyou or your spouse were covered by an employerretirement planat any time during the year for which

contributions were made, you may not be able to deductall of the contributions. Your deduction may be reducedor eliminated, depending on the amount of your incomeand your filing status, as discussed later under De-duction Limits. Any limit on the amount you can deductdoes not affect the amount that can be contributed. SeeNondeductible Contributions, later.

Are You Covered by an Employer

Plan?The Form W2 you receive from your employer has abox used to indicate whether you were covered for theyear. The Pension Plan box should have a mark in itif you were covered.

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

Employer plans. An employer retirement plan is onethat an employer sets up for the benefit of its employ-ees. For purposes of the traditional IRA deduction rules,an employer retirement plan is any of the following

plans.

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

A 401(k) plan (generally an arrangement includedin a profit-sharing or stock bonus plan that allowsyou to choose to either take part of your compen-sation from your employer in cash or have youremployer pay it into the plan).

A union plan (a qualified stock bonus, pension, orprofit-sharing plan created by a collective bargainingagreement).

A qualified annuity plan.

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

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

A simplified employee pension (SEP) plan.

A 501(c)(18) trust (a certain type of tax-exempt trustcreated before June 25, 1959, that is funded only

by employee contributions) if you made deductiblecontributions during the year.

A SIMPLE plan.

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

When Are You Covered?Special rules apply to determine whether you are con-sidered covered by a plan for a tax year. These rulesdiffer depending on whether the plan is a defined con-tribution plan or a defined benefit plan.



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Table 1.1 Can I Take a Traditional IRA Deduction? This chart sums up whether you can take afull deduction, a partial deduction, or no deduction, as discussed in this chapter.

If yourModified AGI*

is:

If You Are Covered by aRetirement Plan at Work and Your

Filing Status is:

At Least

Single

Head ofHousehold

MarriedFiling Jointly(even if yourspouse is notcovered by aplan at work)

Qualifying

Widow(er)

*Modified AGI (adjusted gross income). For Form 1040A, it is the amounton line 14 increased by any excluded qualified bond interest shown onForm 8815, Exclusion of Interest from Series EE and I U.S. Savings BondsIssued after 1989, and certain tax-exempt income amounts. (See Modifiedadjusted gross income, later.) For Form 1040, it is the amount on line 33,figured without taking into account any IRA deduction or any foreign earnedincome exclusion and foreign housing exclusion (deduction), any student

**If you did not live with your spouse at any time during the year,your filing status is considered, for this purpose, as Single (thereforeyour IRA deduction is determined under the Single column).

Married FilingSeparately**

But LessThan You Can Take

$0.01 $10,000.00 Full deduction Full deduction Partial deduction

$10,000.00 $31,000.00 Full deduct ion Full deduct ion No deduc tion

$31,000.00 $41,000.00 Partial deduction Full deduction No deduction

$41,000.00 $51,000.00 No deduction Full deduction No deduction

$51,000.00 $61,000.00 No deduction No deduction

$61,000.00 No deduction No deduction No deduction

Married FilingJointly (andyour spouse iscovered by aplan at work)

MarriedFilingSeparately(and yourspouse iscovered bya plan at

work)***

FullDeduction

MarriedFiling Jointlyor Separately(and spouse isnot coveredby a plan atwork)

If You Are Not Covered by aRetirement Plan at Work and Your

Filing Status is:

Single

Head ofHousehold

QualifyingWidow(er)

You Can Take

Partial deduction

You Can Take

Full deduction

Full deduction

Full deduction

Full deduction

You Can Take You Can Take You Can Take You Can Take

FullDeduction

***You are entitled to the full deduction if you did not live with yourspouse at any time during the year.

$150,000.00

Full deduction

Full deduction

$160,000.00

$160,000.00 or over

No deduction

No deduction

No deduction

No deduction

No deduction

No deduction

Partial deduction

No deduction

$150,000.00

Partial deduction

No deduction

No deduction

No deduction

No deduction

No deduction

No deduction

No deduction

loan interest deduction, any qualified bond interest exclusion fromForm 8815, and certain tax-exempt income amounts. (See Modifiedadjusted gross income, later.)

Defined contribution plan. A defined contribution planis a plan that provides for a separate account for eachperson covered by the plan. In a defined contributionplan, the amount to be contributed to each participant's

account is spelled out in the plan. The level of benefitsactually provided to a participant depends on the totalamount contributed to that participant's account andany earnings on those contributions. Types of definedcontribution plans include profit-sharing plans, stockbonus plans, and money purchase pension plans.

Generally, you are considered covered by a definedcontribution plan if amounts are contributed or allocatedto your account for the plan year that ends within yourtax year.

Example. Company A has a money purchase pen-sion plan. Its plan year is from July 1 to June 30. Theplan provides that contributions must be allocated as

of June 30. Bob, an employee, leaves Company A onDecember 30, 1998. The contribution for the plan yearending on June 30, 1999, is not made until February15, 2000 (when Company A files its corporate incometax return). In this case, Bob is considered covered bythe plan for his 1999 tax year.

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

Defined benefit plan. A defined benefit plan is any planthat is not a defined contribution plan. In a definedbenefit plan, the level of benefits to be provided to eachparticipant is spelled out in the plan. The plan admin-

istrator figures the amount needed to provide thosebenefits and those amounts are contributed to the plan.Defined benefit plans include pension plans and annuityplans.

If you are eligible (meet minimum age and years ofservice requirements) to participate in your employer'sdefined benefit plan for the plan year that ends withinyour tax year, you are considered covered by the plan.This rule applies even if you declined to be covered bythe plan, you did not make a required contribution, oryou did not perform the minimum service required toaccrue a benefit for the year.

Example. Nick, an employee of Company B, is eli-

gible for coverage under Company B's defined benefitplan with a July 1 to June 30 plan year. Nick leavesCompany B on December 30, 1998. Since Nick is eli-gible for coverage under the plan for its year endingJune 30, 1999, he is considered covered by the planfor his 1999 tax year.

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



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

When Are You Not Covered?You are not covered by an employer plan in the fol-lowing situations.

Social security or railroad retirement. Coverage un-

der social security or railroad retirement (Tier I and TierII) does not count as coverage under an employer re-tirement plan.

Benefits from previous employer's plan. If you re-ceive retirement benefits from a previous employer'splan and you are not covered under another employerplan, you are not considered covered by a plan.

Reservists. If the only reason you participate in a planis because you are a member of a reserve unit of thearmed forces, you may not be considered covered bythe plan. You are not considered covered by the planif bothof the following conditions are met.

1) The plan you participate in is established for itsemployees by:

a) The United States,

b) A state or political subdivision of a state, or

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

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

Volunteer firefighters. If the only reason you partic-ipate in a plan is because you are a volunteer firefighter,

you may not be considered covered by the plan. Youare not considered covered by the plan if bothof thefollowing conditions are met.

1) The plan you participate in is established for itsemployees by:

a) The United States,

b) A state or political subdivision of a state, or

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

2) Your accrued retirement benefits at the beginningof the year will not provide more than $1,800 per

year at retirement.

Social Security RecipientsComplete the worksheets in Appendix B of this publi-cation if, for the year, allof 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 employerretirement plan.

Use these worksheets to figure your IRA deduction andthe taxable portion, if any, of your social security ben-efits. Appendix B includes an example with filled-inworksheets to assist you.

Deduction LimitsAs discussed under How Much Can I Deduct?, earlier,the deduction you can take for contributions made toyour traditional IRA depends on whether you or your

spouse were covered for any part of the year by anemployer retirement plan. Your deduction is also af-fected by how much income you had and by your filingstatus, as explained later under Reduced or no de-duction.

Full deduction. If neither you nor your spouse werecovered for any part of the year by an employer retire-ment plan, you can take a deduction for your totalcontributions to one or more traditional IRAs of up to$2,000, or 100% of your compensation, whichever isless. This limit is reduced by any contributions made toa 501(c)(18) plan on your behalf.

Spousal IRA. In the case of a married couple withunequal compensation who file a joint return, the de-duction for contributions to the traditional IRA of thespouse with less compensation is limited to the smallerof the following two amounts:

1) $2,000, or

2) The total compensation includible in the gross in-come of both you and your spouse for the year re-duced by the following two amounts.

a) Your spouse's IRA deduction for the year.

b) Any contributions for the year to a Roth IRA onbehalf of your spouse.

This limit is reduced by any contributions to a section501(c)(18) plan on behalf of the spouse with less com-pensation.

Reduced or no deduction. If either you or your spousewere covered by an employer retirement plan, you maybe entitled to only a partial (reduced) deduction or nodeduction at all, depending on your income and yourfiling status. Your deduction begins to decrease (phaseout) when your income rises above a certain amountand is eliminated altogether when it reaches a higheramount. The amounts vary depending on your filingstatus. See Table 1.1, earlier.

To determine if your deduction is limited, you mustdetermine your modified adjusted gross income (AGI)and your filing status, as explained under DeductionPhaseout.

Deduction PhaseoutIf you are covered by an employer retirement plan, yourIRA deduction is reduced or eliminated entirely de-pending on your filing status and modified AGI, asshown in Table A.



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TIPFor 2000, if you are covered by a retirementplan at work, your IRA deduction will not be re-duced (phased out) unless your modified AGI

is between:

$32,000 (a $1,000 increase) and $42,000 for a sin-gle individual (or head of household),

$52,000 (a $1,000 increase) and $62,000 for amarried couple (or a qualifying widow(er)) filing ajoint return, or

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

If you are not covered by an employer retirementplan, but your spouse is, your IRA deduction is reducedor eliminated entirely depending on your filing statusand modified AGI as shown in the following Table B.

Filing status. Your filing status depends primarily onyour marital status. For this purpose you need to knowif your filing status is single or head of household,

married filing jointly or qualifying widow(er), or marriedfiling separately. If you need more information on filingstatus, see Publication 501, Exemptions, Standard De-duction, and Filing Information.

Married filing separate exception. If you did notlive with your spouse at any time during the year andyou file a separate return, you are not treated as mar-ried and your filing status is considered, for this pur-pose, as single.

Modified adjusted gross income (AGI). How you fig-ure your modified AGI depends on whether you arefiling Form 1040 or Form 1040A.

Form 1040. If you file Form 1040, figure the amounton the page 1 adjusted gross income line withouttaking into account any:

IRA deduction,

Student loan interest deduction,

Foreign earned income exclusion,

Foreign housing exclusion or deduction,

Exclusion of qualified bond interest shown on Form8815, or

Exclusion of employer-paid adoption expensesshown on Form 8839.

This is your modified AGI.Form 1040A. If you file Form 1040A, figure the

amount on the page 1 adjusted gross income linewithout taking into account any:

IRA deduction,

Student loan interest deduction,

Exclusion of qualified bond interest shown on Form

8815, or Exclusion of employer-paid adoption expenses

shown on Form 8839.

This is your modified AGI.

CAUTION

!Do not assume that modified AGI is the sameas your compensation. You will find that yourmodified AGI may include income in addition to

your taxable compensation such as interest, dividends,and income from IRA distributions, discussed next.

Income from IRA distributions. If you receiveddistributions in 1999 from one or more traditional IRAs

and your traditional IRAs include only deductible con-tributions, the distributions are fully taxable.If you made contributions to a traditional IRA for 1999

that may be nondeductible contributions (discussedlater), depending on whether your IRA deduction forthat year is reduced (see Deduction Phaseout, earlier),the distributions may be partly tax free and partly taxa-ble. In that case, you must figure the taxable part of thetraditional IRA distribution before you can figure yourmodified AGI. To do this, you can use the WorksheetTo Figure Taxable Part of Distribution, under Are Dis-tributions Taxable?, later.

Note. In 1999, you may have received taxable dis-tributions from IRAs other than traditional IRAs as dis-

cussed in chapters 2, 3, and 5.

How To Figure Your Reduced IRADeduction

If you are covered by an employer retirementplan and your modified AGI is within thephaseout range for your filing status (see Table

A under Deduction Phaseout, earlier), your IRA de-duction must be reduced. If you are not covered, butyour spouse is, see Table Bunder Deduction Phaseout.

You can figure your reduced IRA deduction for ei-therForm 1040 or Form 1040A by using the Worksheet

Table A

If your filing statusis:

Your IRA deductionis reduced if yourmodified AGIis between:

Yourdeductionis eliminatedif yourmodified AGIis:

Single, orHead of household $31,000 and $41,000 $41,000 or more

Marriedjoint return,

or Qualifyingwidow(er) $51,000 and $61,000 $61,000 or more

Marriedseparatereturn $ 0 and $10,000 $10,000 or more

Table B

If your filing statusis:

Your IRA deductionis reduced if yourmodified AGIis between:

Yourdeductionis eliminatedif yourmodified AGIis:

Marriedjoint return $150,000 and $160,000 $160,000 or more

Marriedseparatereturn $ 0 and $ 10,000 $ 10,000 or more



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for Reduced IRA Deduction, that follows. Also, the in-structions for these tax forms include similar work-sheets.

Note. If you were married and either or both you andyour spouse worked and you both contributed to IRAs,figure the deduction for each of you separately.

If you were divorced or legally separated (and did

not remarry) before the end of the year, you cannotdeduct any contributions to your spouse's IRA. After adivorce or legal separation, you can deduct the contri-butions to your own IRA and your deductions are sub-

ject to the rules for single individuals.

Figuring deductible and nondeductible contribu-tions to a traditional IRA (including a spousal IRA).Complete lines 1 through 8 to figure your deductible andnondeductible IRA contributions for the year.

Note. If line 2 is equal to or more than the amounton line 1, STOP HERE. Contributions to your traditionalIRA are not deductible. See Nondeductible Contribu-tions, later.

Reporting Deductible Contributions

You do not have to itemize deductions to claim yourdeduction for IRA contributions. If you file Form 1040,deduct IRA contributions for 1999 on line 23. If you fileForm 1040A, deduct IRA contributions on line 15.Form 1040EZdoes not provide for IRA deductions.

When you must use Form 1040. You must useForm 1040 if you owe tax on any early distributions fromyour IRA, any excess contributions made to your IRA,or any excess accumulations in your IRA account. SeeWhat Acts Result in Penalties?, later.

Note. If you made contributions to a section501(c)(18) pension plan, include your deduction in thetotal on line 32, Form 1040. Enter the amount and

501(c)(18) on the dotted line next to line 32. SeePublication 575 for information on deduction limits thatapply to contributions to these plans.

Self-employed. If you are self-employed (a sole pro-prietor or partner) and have a SEP-IRA or a SIMPLEIRA, take your deduction for allowable plan contribu-tions on line 29, Form 1040.

Withholding allowances. To figure the number ofadditional withholding allowances on your Form W4,Employee's Withholding Allowance Certificate, you cantake into account your estimated deductible IRA con-tributions. For this purpose, however, do not take into

account any of your employer's regular contributions toyour SEP-IRA or SIMPLE IRA. They generally are notincluded in your income and you cannot deduct them.SEP-IRAs and SIMPLE IRAs are discussed later inchapters 4 and 5. For more information on withholding,see Publication 505, Tax Withholding and EstimatedTax.

Form 5498. You should receive by June 1, 2000, Form5498 or a similar statement from plan sponsors, show-ing all the contributions made to your IRA for 1999.

Nondeductible Contributions

Although your deduction for IRA contributions may bereduced or eliminated (see How Much Can I Deduct?,earlier), a contribution can be made to your IRA of upto $2,000 or 100% of compensation, whichever is less.For a spousal IRA, see Spousal IRA limit, under HowMuch Can Be Contributed?, earlier. The difference be-tween your total permitted contributions and your totaldeductible contributions, if any, is your nondeductiblecontribution.

Example. Sonny Martin is single. In 1999, he iscovered by a retirement plan at work. His salary is$52,312. His modified adjusted gross income (modifiedAGI) is $55,000. Sonny makes a $2,000 IRA contribu-

7. IRA deduction. Compare lines 4, 5, and 6. Enter thesmallest amount (or a smaller amount if you choose)here and on the Form 1040 or 1040A line for your IRA,whichever applies. If line 6 is more than line 7 and youwant to make a nondeductible contribution, go to line8. ..................................................................................

8. Nondeductible contribution. Subtract line 7 from line5 or 6, whichever is smaller. Enter the result here andon line 1 of your Form 8606. .......................................

Worksheet for Reduced IRA Deduction

(Use only if you or your spouse is covered by an employer plan andyour modified AGI is within the phaseout range that applies.)

If you are coveredandyour filing status is:

And yourmodified AGIis over:

Enteronline 1below:

Single orHead of household $ 31,000 $ 41,000

Marriedjoint return orQualifying widow(er) $ 51,000 $ 61,000

Marriedseparate return $ 0 $ 10,000

If your spouse is covered, but youare not, and your filing status is:


Enteronline 1below:

Marriedjoint return $150,000 $160,000

Marriedseparate return $0 $ 10,000

1. Enter the amount from above that applies ..................2. Enter your modified AGI(that of both spouses, if

married filing jointly) .....................................................

3. Subtract line 2 from 1. If line 3 is $10,000 or more,STOP HERE. You can take a full IRA deduction forcontributions of up to $2,000 or 100% of your com-

pensation, whichever is less. .......................................4. Multiply line 3 by 20% (.20). If the result is not a mul-

tiple 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 ...................

5. Enter your compensation. If you are filing a joint returnand your compensation is less than your spouse's,include your spouse's compensation reduced by hisor her traditional IRA contribution and contributions toRoth IRAs for this year. If you file Form 1040, do notreduce your compensation by any losses from self-employment.

6. Enter contributions made, or to be made, to your tra-ditional IRA for 1999, but do not enter more than$2,000. If contributions are more than $2,000, seeExcess Contributions, later. .........................................



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Form 1040

Form 1040A

23IRA deduction (see page 26)23

Medical savings account deduction. Attach Form 8853 2525

One-half of self-employment tax. Attach Schedule SE

26

Self-employed health insurance deduction (see page 28)

26

2727

Keogh and self-employed SEP and SIMPLE plans

2828

Penalty on early withdrawal of savings

2929

Alimony paid b Recipients SSN

32Add lines 23 through 31a

30

Subtract line 32 from line 22. This is your adjusted gross income

31a

AdjustedGrossIncome

33

Cat. No. 11320B Form 1040 (1999)

Moving expenses. Attach Form 3903

24 24

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 54.

32

31a

Student loan interest deduction (see page 26)

30

33

IRA deduction (see page 30).15 15

Student loan interest deduction (see page 30). 16Add lines 15 and 16. These are your total adjustments. 17

Subtract line 17 from line 14. This is your adjusted gross income.

16

18Form 1040A (1999)

17

18

Adjustedgrossincome

Cat. No. 11327AFor Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 53.

tion for that year. Because he is covered by a retirementplan and his modified AGI is above $41,000, he cannotdeduct his $2,000 IRA contribution. However, he canchoose to either:

1) Designate this contribution as a nondeductiblecontribution by reporting it on his tax return, as ex-plained later under Reporting Nondeductible Con-tributions, or

2) Withdraw the contribution as explained later underContributions returned before the due date.

As long as contributions are within the contributionlimits, none of the earnings or gains on those contribu-tions (deductible or nondeductible) will be taxed untilthey are distributed. See When Can I Withdraw or UseIRA Assets?, later.

Cost basis. You will have a cost basis in your IRA ifthere are nondeductible contributions. Your basis is the

sum of the nondeductible contributions to your IRA lessany distributions of those amounts. When you withdraw(or receive distributions of) these amounts, as dis-cussed later under Are Distributions Taxable?, you cando so tax free.

CAUTION

!Generally, you cannot withdraw only theamounts representing your basis. If deductiblecontributions have been made to any of your

traditional IRAs, your withdrawals from any of your IRAswill generally include both taxable and nontaxable (ba-sis) amounts. SeeAre Distributions Taxable?, later, formore information.

Reporting Nondeductible ContributionsYou must report nondeductible contributions, but youdo not have to designate a contribution as nondeduct-ible until you file your tax return. When you file, you caneven designate otherwise deductible contributions asnondeductible.

Designating nondeductible contributions. To des-

ignate contributions as nondeductible, you must fileForm 8606. (See the filled-in Forms 8606 in AppendixD.) You must file Form 8606 to report nondeductiblecontributions even if you do not have to file a tax returnfor the year.

Form 8606. You must file Form 8606 if anyof the fol-lowing applies.

You made nondeductible contributions to a tradi-tional IRA for 1999.

You received distributions from a traditional IRA in

1999 and you have ever made nondeductible con-tributions to a traditional IRA.

You converted part or all of the assets in a tradi-tional IRA or a SIMPLE IRA to a Roth IRA during1999. See chapter 2.

You recharacterized amounts that were convertedto a Roth IRA. See chapter 2.

You received distributions from a Roth IRA in 1999.See chapter 2.

You have a recharacterization involving a Roth IRAcontribution. See chapter 2.



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You are the beneficiary of an education IRA and youreceived distributions from an education IRA in1999. See chapter 3.

TIPYou arenotrequired to file Form 8606 to reportcontributions to Roth or education IRAs.

Failure to report nondeductible contributions. If youdo not report nondeductible contributions, all of the

contributions to your traditional IRA will be treated asdeductible. When you make withdrawals from your IRA,the amounts you withdraw will be taxed unless you canshow, with satisfactory evidence, that nondeductiblecontributions were made.

There is a recordkeeping worksheet, Appendix A,Summary Record of Traditional IRA(s) for 1999, thatyou can use to keep records of deductible and non-deductible IRA contributions.

Penalty for overstatement. If you overstate theamount of nondeductible contributions on your Form8606 for any tax year, you must pay a penalty of $100for each overstatement, unless it was due to reasonablecause.

Penalty for failure to file Form 8606. You will haveto pay a $50 penalty if you do not file a required Form8606, unless you can prove that the failure was due toreasonable cause.

Examples Worksheet forReduced IRA DeductionThe following examples illustrate the use of the IRAdeduction worksheet shown earlier under How To Fig-

ure Your Reduced IRA Deduction.Example 1. For 1999, Tom and Betty Smith file a

joint return on Form 1040. They both work and Tom iscovered by his employer's retirement plan. Tom's salaryis $40,000 and Betty's is $16,555. They each have atraditional IRA and their combined modified AGI is$57,555. Since their modified AGI is between $51,000and $61,000 and Tom is covered by an employer plan,Tom is subject to the deduction phaseout discussedearlier under Deduction Limits.

For 1999, Tom contributed $2,000 to his IRA andBetty contributed $2,000 to hers. Even though they filea joint return, they must use separate worksheets to

figure the IRA deduction for each of them.Tom can take a deduction of only $690. He musttreat $1,310 ($2,000 minus $690) of his contributionsas nondeductible.

He can choose to treat the $690 as either deductibleor nondeductible contributions. He can either leave the$1,310 of nondeductible contributions in his IRA orwithdraw them by April 17, 2000. He decides to treatthe $690 as deductible contributions and leave the$1,310 of nondeductible contributions in his IRA.

Using the Worksheet for Reduced IRA Deduction,Tom figures his deductible and nondeductible amountsas follows:

Note. If line 2 is equal to or more than the amounton line 1, STOP HERE. Your IRA contributions are notdeductible. See Nondeductible Contributions, earlier.

Betty figures her IRA deduction as follows. Betty cantreat all or part of her contributions as either deductibleor nondeductible. This is because her $2,000 contribu-

tion for 1999 is not subject to the deduction phaseoutdiscussed earlier under Deduction Limits. She does notneed to use the Worksheet for Reduced IRA Deductionsince their modified AGI is not within the phaseoutrange that applies. Betty decides to treat her $2,000IRA contributions as deductible.

The IRA deductions of $690 and $2,000 on the jointreturn for Tom and Betty total $2,690.

Example 2. Assume the same facts as in Example1, except that Tom contributed $2,000 to his Roth IRAand $2,000 to a traditional IRA for Betty (a spousal IRA)because Betty had no compensation for the year and

Worksheet for Reduced IRA Deduction(Use only if you or your spouse is covered by an employer plan andyour modified AGI is within the phaseout range that applies.)



Enteronline 1below:

Single, orHead of household $31,000 $41,000

Marriedjoint return, orQualifying widow(er) $51,000 $61,000

Marriedseparate return $ 0 $10,000



Enteronline 1below:



1. Enter the amount from above that applies .................. $ 61,0002. Enter your modified AGI(that of both spouses, if

married filing jointly) ..................................................... 57,555

3. Subtract line 2 from line 1. If line 3 is $10,000 ormore, STOP HERE. You can take a full IRA deductionfor contributions of up to $2,000 or 100% of yourcompensation, whichever is less. ................................ 3,445

4. Multiply line 3 by 20% (.20). If the result is not a mul-tiple 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 ................... 690

5. Enter your compensation. If you are filing a joint returnand your compensation is less than your spouse's,include your spouse's compensation reduced by hisor her traditional IRA contribution and contributions toRoth IRAs for this year. If you file Form 1040, do notreduce your compensation by any losses from self-employment. 40,000

6. Enter contributions made, or to be made, to your IRAfor 1999, but do not enter more than $2,000. If con-tributions are more than $2,000, see Excess Contri-butions, later. ............................................................... 2,000

7. IRA deduction. Compare lines 4, 5, and 6. Enter thesmallest amount (or a smaller amount if you choose)here and on the Form 1040 or 1040A line for your IRA,whichever applies. If line 6 is more than line 7 and youwant to make a nondeductible contribution, go to line8. .................................................................................. 690

8. Nondeductible contribution. Subtract line 7 from line5 or 6, whichever is smaller. Enter the result here andon line 1 of your Form 8606. ....................................... 1,310



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did not contribute to an IRA. Also, their modified AGIhas increased to $156,555. Betty figures her IRA de-duction as follows:

Note. If line 2 is equal to or more than the amounton line 1, STOP HERE. Your IRA contributions are notdeductible. See Nondeductible Contributions, earlier.

Can I Move Retirement PlanAssets?Traditional IRA rules permit you to transfer, tax free,assets (money or property) from other retirement pro-grams (including traditional IRAs) to a traditional IRA.The rules permit 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, youcan move assets from a traditional IRA to a Roth IRA.See the discussion at Can I Move Amounts Into a RothIRA?in chapter 2.

Trustee-to-Trustee TransferA transfer of funds in your traditional IRA from onetrustee directly to another, either at your request or atthe trustee's request, is not a rollover. Because thereis no distribution to you, the transfer is tax free. Be-cause it is not a rollover, it is not affected by the 1-yearwaiting period that is required between rollovers, dis-cussed later under Rollover From One IRA Into An-other.

For information about direct transfers from retirementprograms other than traditional IRAs, see Direct rolloveroption, later in this chapter.

RolloversGenerally, a rollover is a tax-free distribution to you ofcash or other assets from one retirement plan that youcontribute to another retirement plan. The contributionto the second retirement plan is called a rollover con-tribution.

Note. The amount you roll over tax free is generallytaxable later when the new plan pays that amount toyou or your beneficiary.

Kinds of rollovers to an IRA. There are two kinds ofrollover contributions to a traditional IRA. In one, youput amounts you receive from one traditional IRA intoanother traditional IRA. In the other, you put amountsyou receive from an employer's qualified retirementplan for its employees (see Employer plansunder AreYou Covered by an Employer Plan?, earlier) into a tra-ditional IRA.

Treatment of rollovers. You cannot deduct a rollovercontribution, but you must report the rollover distributionon your tax return as discussed later under Reportingrollovers from IRAs and Reporting rollovers from em-ployer plans.

Rollover notice. A written explanation of rollovertreatment must be given to you by the plan making the

distribution.

Time Limit for Makinga Rollover ContributionYou must make the rollover contribution by the 60th dayafter the day you receive the distribution from your tra-ditional IRA or your employer's plan. However, seeExtension of rollover period, later.

Rollovers completed after the 60-day period.Amounts not rolled over within the 60-day period do notqualify for tax-free rollover treatment and you must betreat them as a taxable distribution from either your IRA

Worksheet for Reduced IRA Deduction(Use only if you or your spouse is covered by an employer plan andyour modified AGI is within the phaseout range that applies.)



Enteronline 1below:

Single, orHead of household $31,000 $41,000

Marriedjoint return, orQualifying widow(er) $51,000 $61,000

Marriedseparate return $ 0 $10,000



Enteronline 1below:



1. Enter the amount from above that applies .................. $160,0002. Enter your modified AGI(that of both spouses, if

married filing jointly) ..................................................... 156,555

3. Subtract line 2 from line 1. If line 3 is $10,000 ormore, STOP HERE. You can take a full IRA deductionfor contributions of up to $2,000 or 100% of yourcompensation, whichever is less. ................................ 3,445

4. Multiply line 3 by 20% (.20). If the result is not a mul-tiple 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 ................... 690

5. Enter your compensation. If you are filing a joint returnand your compensation is less than your spouse's,include your spouse's compensation reduced by his

or her traditional IRA contribution and contributions toRoth IRAs for this year. If you file Form 1040, do notreduce your compensation by any losses from self-employment. 38,000*

6. Enter contributions made, or to be made, to your IRAfor 1999, but do not enter more than $2,000. (If con-tributions are more than $2,000, see Excess Contri-butions, later.) .............................................................. 2,000

7. IRA deduction. Compare lines 4, 5, and 6. Enter thesmallest amount (or a smaller amount if you choose)here and on the Form 1040 or 1040A line for your IRA,whichever applies. (If line 6 is more than line 7 andyou want to make a nondeductible contribution, go toline 8.) .......................................................................... 690

8. Nondeductible contribution. Subtract line 7 from line5 or 6, whichever is smaller. Enter the result here andon line 1 of your Form 8606. ....................................... 1,310

* $0 plus $40,000 minus $2,000 = $38,000.



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or your employer's plan. The amount not rolled over istaxable in the year distributed, not in the year the60-day period expires. You may also have to pay a 10%tax on premature distributions as discussed later underPremature Distributions (Early Withdrawals).

Treat a contribution after the 60-day period as aregular contribution to your IRA. Any part of the contri-bution that is more than the maximum amount youcould contribute may be an excess contribution, asdiscussed later under Excess Contributions.

Extension of rollover period. If an amount distributedto you from a traditional IRA or a qualified employerretirement plan becomes a frozen deposit in a finan-cial institution during the 60-day period allowed for arollover, a special rule extends the rollover period.

The period during which the amount is a frozen de-posit is not counted in the 60-day period, nor can the60-day period end earlier than 10 days after the depositis no longer frozen. To qualify under this rule, the de-posit must be frozen on at least one day during the60-day rollover period.

Frozen deposit. This is any deposit that cannot be

withdrawn because of eitherof the following reasons.

1) The financial institution is bankrupt or insolvent.

2) The state where the institution is located restrictswithdrawals because one or more financial insti-tutions in the state are (or are about to be) bankruptor insolvent.

Rollover From One IRA Into AnotherYou can withdraw, tax free, all or part of the assets fromone traditional IRA if you reinvest them within 60 daysin another traditional IRA. Because this is a rollover, youcannot deduct the amount that you reinvest in the new

IRA.

TIPYou may be able to treat a contribution madeto one type of IRA as having been made to adifferent type of IRA. This is called recharac-

terizing the contribution. See Recharacterizations inchapter 2 for more information.

Waiting period between rollovers. You can take (re-ceive) a distribution from a traditional IRA and make arollover contribution (of all or part of the amount re-ceived) to another traditional IRA only once in any1-year period. The 1-year period begins on the date youreceive the IRA distribution, not on the date you roll itover into another IRA. This rule applies separately toeach traditional IRA you own.

Example. If you have two traditional IRAs, IRA1and IRA2, and you roll over assets of IRA1 into a newtraditional IRA (IRA3), you may also make a rolloverfrom IRA2 into IRA3, or into any other traditional IRA,within 1 year after the rollover distribution from IRA1.These are both allowable rollovers because you havenot received more than one distribution from either IRAwithin 1 year. However, you cannot, within the 1-yearperiod, again roll over the assets you rolled over intoIRA3 into any other traditional IRA.

If any amount distributed from a traditional IRA isrolled over tax free, later distributions from that IRAwithin a 1-year period will not qualify as rollovers. Theyare taxable and may be subject to the 10% tax onpremature distributions.

Exception. An exception to the 1-year waiting pe-riod rule has been granted by the IRS for distributionsmade from a failed financial institution by the FederalDeposit Insurance Corporation (FDIC) as receiver forthe institution. To qualify for the exception, the distri-

bution must satisfy bothof the following requirements.

1) It must notbe initiated by either the custodial insti-tution or the depositor.

2) It must be made because:

a) The custodial institution is insolvent, and

b) The receiver is unable to find a buyer for theinstitution.

The same property must be rolled over. You mustroll over into a new traditional IRA the same propertyyou received from your old traditional IRA.

Partial rollovers. If you withdraw assets from a tradi-tional IRA, you can roll over part of the withdrawal taxfree into another traditional IRA and keep the rest of it.The amount you keep will generally be taxable (exceptfor the part that is a return of nondeductible contribu-tions) and may be subject to the 10% tax on prematuredistributions discussed later under Premature Distribu-tions (Early Withdrawals).

Required distributions. Amounts that must be distrib-uted during a particular year under the required distri-bution rules (discussed later) are not eligible forrollovertreatment.

Inherited IRAs. If you inherit a traditional IRA fromyour spouse, you generally can roll it over into a tradi-tional IRA established for you, or you can choose tomake it your own as discussed earlier (see InheritedIRAsunder How Much Can Be Contributed?). Also, seeDistributions received by a surviving spouse, later.

Not inherited from spouse. If you inherited a tra-ditional IRA from someone other than your spouse, youcannot roll it over or allow it to receive a rollover con-tribution. You must withdraw the IRA assets within acertain period. For more information, seeBeneficiaries,under When Must I Withdraw IRAAssets?, later.

Reporting rollovers from IRAs. Report any rolloverfrom one traditional IRA to another traditional IRA onlines 15a and 15b of Form 1040, or on lines 10a and10b of Form 1040A. Enter the total amount of the dis-tribution on line 15a of Form 1040, or on line 10a ofForm 1040A. If the total amount on line 15a of Form1040, or on line 10a of Form 1040A was rolled over,enter zero on line 15b of Form 1040, or on line 10b ofForm 1040A. Otherwise, enter the taxable portion of thepart that was not rolled over on line 15b of Form 1040,or on line 10b of Form 1040A. See Distributions Fullyor Partly Taxableunder Are Distributions Taxable?.



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Rollover From Employer's PlanInto an IRAIf you receive an eligible rollover distribution fromyour (or your deceased spouse's) employer's qualifiedpension, profit-sharing or stock bonus plan, annuityplan, or tax-sheltered annuity plan (403(b) plan), youcan roll over all or part of it into a traditional IRA.

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

Eligible rollover distribution. Generally, an eligiblerollover distribution is the taxable part of any distributionof all or part of the balance to your credit in a qualifiedretirement plan except:

1) A required minimum distribution,

2) Hardship distributions from 401(k) plans and 403(b)plans, or

3) Any of a series of substantially equal periodic dis-tributions paid at least once a year over:

a) Your lifetime or life expectancy,

b) The lifetimes or life expectancies of you andyour beneficiary, or

c) A period of 10 years or more.

The taxable parts of most other distributions are eligiblerollover distributions. See Maximum rollover, later.Also, see Publication 575 for additional exceptions.

Written explanation to recipients. The administratorof a qualified employer plan must, within a reasonableperiod of time before making an eligible rollover distri-bution, provide you with a written explanation. It musttell you about all of the following.

Your right to have the distribution paid tax free di-rectly to a traditional IRA or another eligible retire-ment plan.

The requirement to withhold tax from the distributionif it is not paid directly to a traditional IRA or anothereligible retirement plan.

The nontaxability of any part of the distribution thatyou roll over to a traditional IRA or another eligibleretirement plan within 60 days after you receive thedistribution.

Other qualified employer plan rules, if they apply,including those for lump-sum distributions, alternatepayees, and cash or deferred arrangements.

The plan administrator must provide you with a writ-ten explanation no earlier than 90 days and no laterthan 30 days before the distribution is made.

However, you can choose to have a distributionmade less than 30 days after the explanation is pro-vided as long as bothof the following requirements aremet.

1) You are given at least 30 days after the notice isprovided to consider whether you want to elect adirect rollover.

2) You are given information that clearly states thatyou have this 30-day to make the decision.

Contact the plan administrator if you have anyquestions regarding this information.

Withholding requirement. If an eligible rollover dis-tribution is paid directly to you, the payer must withhold20% of it. This applies even if you plan to roll over the

distribution to a traditional IRA (or another qualified planas discussed in Publication 575). However, you canavoid withholding by choosing the direct rollover option,discussed later.

Exceptions. Withholding from an eligible rolloverdistribution paid to you is not required if eitherof thefollowing conditions apply.

1) The distribution and all previous eligible rolloverdistributions you received during your tax year fromthe same plan (or, at the payer's option, from allyour employer's plans) total less than $200.

2) The distribution consists solely of employer securi-

ties, plus cash of $200 or less in lieu of fractionalshares.

Other withholding rules. If you receive a distribu-tion that is not an eligible rollover distribution, the 20%withholding requirement does not apply. However,other withholding rules apply to these distributions. Therules that apply depend on whether the distribution isa periodic distribution or a nonperiodic distribution thatis not an eligible rollover distribution. For either of thesedistributions, you can still choose not to have tax with-held. For more information, get Publication 575.

Direct rollover option. Your employer's qualified planmust give you the option to have any part of an eligiblerollover distribution paid directly to a traditional IRA (orto an eligible retirement plan as discussed in Publica-tion 575). Under this option, all or part of the distributioncan be paid directly to a traditional IRA (or another eli-gible retirement plan that accepts rollovers). The planis not required to give you this option if your eligiblerollover distributions are expected to total less than$200 for the year.

Withholding. If you choose the direct rollover op-tion, no tax is withheld from any part of the designateddistribution that is directly paid to the trustee of thetraditional IRA (or other plan).

If any part is paid to you, the payer must withhold20% of that part's taxable amount. Since most distri-butions are fully taxable, payers will generally withhold20% of the entire amount designated for distribution toyou.

Choosing the right option. You generally can leaveall or part of the distribution in the plan. If you do notleave the distribution in your employer's plan, the fol-lowing comparison chart may help you decide whichdistribution option to choose. Carefully compare thefollowing tax effects of each option.



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TIPIf you decide to roll over tax free any part of adistribution, the direct rollover option will gen-erally be to your advantage. This is because

you will not have 20% withholding or be subject to the10% additional tax under that option.

If you have a lump-sum distribution and do not planto roll over any part of it, the distribution may be eligiblefor special tax treatment that could lower your tax forthe distribution year. In that case, you may want to seePublication 575 and Form 4972, Tax on Lump-Sum

Distributions, and its instructions to determine whetheryour distribution qualifies for special tax treatment and,if so, to figure your tax under the special methods.

You can then compare any advantages from usingForm 4972 to figure your tax on the lump-sum distri-bution with any advantages from rolling over tax freeall or part of the distribution. If you roll over any part ofthe lump-sum distribution, however, you cannot use theForm 4972 special tax treatment for any part of thedistribution.

Maximum rollover. The most you can roll over is thetaxable part of any eligible rollover distribution (definedearlier) from your employer's qualified plan. The distri-bution you receive generally will be all taxable unlessyou have made nondeductible employee contributionsto the plan.

Contributions you made to your employer's plan.You cannot roll over a distribution of contributions youmade to your employer's plan, except voluntarydeductible employee contributions (DECs, defined be-low. If you roll over your contributions (other thanDECs), you must treat them as regular (not rollover)contributions and you may have to pay an excesscontributions tax (discussed later) on all or part of them.

DECs. These are voluntary deductible employeecontributions. Prior to January 1, 1987, employeescould make and deduct these contributions to certainqualified employers' plans and government plans.These are not the same as an employee's electivecontributions to a 401(k) plan, which are not deductibleby the employee.

If you receive a distribution from your employer'squalified plan of any part of the balance of your DECsand the earnings from them, you can roll over any partof the distribution.

Comparison Chart No waiting period between rollovers. You can makemore than one rollover of employer plan distributionswithin a year. The once-a-year limit on IRA-to-IRArollovers does not apply to these distributions.

IRA as a holding account (conduit IRA) for rolloversto other eligible plans. An IRA qualifies as a conduitIRA if it is a traditional IRA that serves as a holdingaccount or conduit for assets received from an eligibledistribution from your first employer's plan. The conduit

IRA must be made up of only those assets and gainsand earnings on those assets. A conduit IRA will nolonger qualify if you mix regular contributions or fundsfrom other sources with the rollover distribution fromyour employer's plan.

If you receive an eligible rollover distribution fromyour employer's plan and roll over part or all of it intoone or more conduit IRAs, you can later roll over thoseassets into a new employer's plan.

Property and cash received in a distribution. If youreceive property and cash in an eligible rollover distri-bution from your employer's plan, you can roll over ei-ther the property or the cash, or any combination of the

two that you choose.Treatment if the same property is not rolled over.

Your contribution to a traditional IRA of cash repre-senting the fair market value of property received in adistribution from a qualified retirement plan does notqualify as a rollover if you keep the property. You musteither roll over the property or sell it and roll over theproceeds, as explained next.

Sale of property received in a distribution from aqualified plan. Instead of rolling over a distribution ofproperty other than cash from a qualified employer re-tirement plan, you can sell all or part of the property androll over the amount you receive into a traditional IRA.You cannot substitute your own funds for property youreceive from your employer's retirement plan.

Example. You receive a total distribution from youremployer's plan consisting of $10,000 cash and$15,000 worth of property. You decided to keep theproperty. You can roll over to a traditional IRA the$10,000 cash received, but you cannot roll over anadditional $15,000 representing the value of the prop-erty you choose not to sell.

Treatment of gain or loss. If you sell the distributedproperty and roll over all the proceeds into a traditionalIRA, no gain or loss is recognized. The sale proceeds

(including any increase in value) are treated as part ofthe distribution and are not included in your gross in-come.

Example. On September 2, Mike received a lump-sum distribution from his employer's retirement plan of$50,000 in cash and $50,000 in stock. The stock wasnot stock of his employer. On September 24, he soldthe stock for $60,000. On October 4, he rolled over$110,000 in cash ($50,000 from the original distributionand $60,000 from the sale of stock). Mike does notinclude the $10,000 gain from the sale of stock as partof his income because he rolled over the entire amountinto a traditional IRA.

Direct Rollover Payment to You

No withholding. Payer must withhold income tax of20% on the taxable part (even if youroll it over to a traditional IRA orother plan).

No 10% additional tax.(See PrematureDistributions, later.)

If you are under age 591/2, a 10%additional tax may apply to the taxablepart (including an amount equal to thetax withheld) that is not rolled over.

Not income until laterdistributed to you fromthe IRA or other plan.

Any taxable part (including an amountequal to the tax withheld) not rolled overis income.



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Note. Special rules may apply to distributions ofemployer securities. For more information, get Publi-cation 575.

Some sales proceeds rolled over. If you roll over partof the amount received from the sale of property, seePublication 575.

Life insurance contract. You cannot roll over a lifeinsurance contract from a qualified plan into a traditional

IRA.

Distributions received by a surviving spouse. If adistribution from an employer's qualified plan or a tax-sheltered annuity is paid to the surviving spouse of adeceased employee, that spouse can roll over into atraditional IRA part or all of any eligible rollover distri-bution (defined earlier). The surviving spouse can alsoroll over all or any part of a distribution of deductibleemployee contributions (DECs).

No rollover into another employer qualified plan.A surviving spouse cannot roll over a distribution de-scribed in the preceding paragraph into another qual-ified employer plan or annuity.

Distributions under divorce or similar proceedings(alternate payees). If you are the spouse or formerspouse of an employee and you receive a distributionfrom a qualified employer plan as a result of divorceor similar proceedings, you may be able to roll over allor part of it into a traditional IRA. To qualify, the distri-bution must be:

1) One that would have been an eligible rollover dis-tribution (defined earlier) if it had been made to theemployee, and

2) Made under a qualified domestic relations order.

Qualified domestic relations order. A domesticrelations order is a judgment, decree, or order (includ-ing approval of a property settlement agreement) thatis issued under the domestic relations law of a state.A qualified domestic relations order gives to an alter-nate payee (a spouse, former spouse, child, or de-pendent of a participant in a retirement plan) the rightto receive all or part of the benefits that would be pay-able to a participant under the plan. The order requirescertain specific information, and it cannot alter theamount or form of the benefits of the plan.

Tax treatment if all of an eligible distribution is not

rolled over. Any part of an eligible rollover distributionthat you keep is taxable in the year you receive it. If youroll over none of it, special rules for lump-sum distribu-tions may apply. See Publication 575. The

us internal revenue service: p590--1999

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