What? Why? How? Midyear Review of Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are an outgrowth of the Employee Retirement Income Security Act  (ERISA) from 1974, which was Congress’s authorization to encourage people to save for their own retirement. 

According to ERISA, any person who has earned income may establish an IRA. Investment income in IRA accounts grow tax-deferred, and, for most people, the contributions are tax deductable as well. IRA contributions can be made in cash only (you cannot contribute property, securities, or anything else).


IRA Cheat Sheet:




Who may contribute to an IRA?

If you are under the age 70.5, you can contribute if you (or your spouse, if filing joint return) have taxable compensation[1]

You can contribute at any age if you (or your spouse if filing a joint return) have taxable compensation AND your MAGI (modified adjusted gross income) is below a certain amount[2]

Are contributions tax deductable?

Sometimes.  You can deduct your contributions if you qualify (if you or your spouse are covered by an employer-sponsored retirement plan, your contributions may not be deductable depending on your MAGI)


How much can someone contribute?

The lesser of  $5500 (< age 50)/$6500 (> age 50) OR your taxable compensation for the year

The lesser of  $5500 (< age 50)/$6500 (> age 50) OR your taxable compensation for the year

What is the deadline to contribute?

April 15th.  There are no extensions.

April 15th.  There are no extensions.

When is it required to take minimum distributions?

By April 1st following the year in which you turn age 70.5.  See this post for more details.

No required age if you are the original owner.

Are there penalties for not taking the required minimum distributions?

Yes, equal to 50% of the amount you should have taken out.


Are distributions taxable?

Any deductable contributions and earnings that are distributed from your traditional IRA are fully taxable; if you have made non-deductable contributions to your IRA, then only a proportion of the distribution will be taxable.

Distributions are not taxable as long as it’s a qualified distribution (must have owned the account for at least 5 years and be over age 59.5)

Are there penalties if you take distributions before you reach age 59.5?

Yes, a 10% federal penalty tax applies on withdrawals of both contributions and earnings unless exceptions apply (ask your tax advisor).

There are no penalties on withdrawals of contributions, however there could be a penalty of 10% federal penalty on withdrawal of earnings unless an exception applies (ask your tax advisor)




Spouses:  Each spouse can make individual contributions up to $5,500 to an IRA whether they are employed or not – however, the combined compensation of the spouses must be at least as much as the amount of their contributions.  In other words, if one spouse earns $9,000, the maximum contribution that they can make is $9000. 

A couple can contribute up to $11,000 per year, but the contributions need to be in 2 separate IRAs ($5,500 per person into each IRA).


Excess contributions.  Contributions greater than the $5,500 limit are subject to an excise tax of 6% of the excess amount. 

IRA contributions are fully tax-deductable regardless of your income level, providing you are not an active participant in a retirement plan set up by your employer.  If you’re an active member of a retirement plan at work, then your contribution to an IRA may or may not be deductable pending your adjusted growth income. 

(Subject to certain limitations, speak to your accountant.)



Non-deductable contributions. Anyone with earned income may make an non-deductable IRA contribution even if they are an active participant in a qualified plan (and regardless of their income level).  Both deductable and non-deductable contributions will earn investment income and are tax-deferred until withdrawn or distributed by the IRA.

Timing of IRA contributions.  Contributions that are made between January 1st and April 15th may be deducted for either the current year or the preceding tax year. 

It’s imperative to notify the custodian as to which year you want your contribution to apply.  In other words, a taxpayer has until April 15th after the close of the tax year to make a deductable IRA contribution for the previous year.  However, contributions made after April 15th are deductable only for the current tax year – regardless of whether the individual tax payer has obtained an extension to file their return.

Other rules that apply to IRAs:

– Taxpayers cannot make contributions in the year they reach 70.5 or later

– Taxpayers are not allowed to borrow from their IRAs (although check out our article on 9 ways to Tap into your Retirement Account without Incurring Penalties)

– Taxpayers are not allowed to co-mingle IRA money with other assets


IRA Investments.  IRA contributions can be invested in a multitude of asset classes except: life insurance policies and collectables (antiques, stamps, gems, coins, artwork, and similar items).  Collectables do not include: gold, silver, platinum or palladium bouillon, gold/silver/platinum coins that are minted by the US treasury. 


Distributions. Check out our post on the nitty-gritty of taking required minimum distributions for IRA accounts.

Rollovers. Check out our post on rolling over retirement accounts.    


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