Individual Retirement Accounts

A taxpayer may set up a traditional Individual Retirement Account (IRA) if he or she received earned compensation during the year and was not age 70 1/2 by the end of the year.  For 2011, contributions to both Traditional and Roth IRAs are limited to the lesser of earned compensation or $5,000 per year per account ($6,000 if age 50 or older).  Contributions may be made to a non-working spouse’s account as well, however total contributions are limited to the earned income of both spouses combined.

Contributions to an IRA can be made up to the due date of the tax return.  However, an extension to file does not extend the time to contribute to an IRA. 

Rollovers from a qualified IRA have no tax consequences nor do withdrawals that are reinvested in a qualified trustee’s plan within 60 days.  Borrowing from the IRA will be considered a disqualifying event that makes the IRA immediately taxable.

An IRA is considered an annuity owned at death for estate tax purposes, and is included in the decedent’s estate.  When an IRA is inherited, a non-spousal beneficiary cannot contribute to or roll over the account (surviving spouses may roll over the amounts).   However, a participant’s spouse may rollover the distributions under the same terms that would have applied to the employee.  No tax is due until distributions are made to the beneficiary, and such distributions are taxed under the rules described below. For these purposes, the decedent’s basis in the IRA carries over to the beneficiary, and a spouse may elect to combine the account with his or her own individual IRA.