Deductible Traditional IRA
You can contribute up to $3,000 per year to your traditional IRA and you may be able to deduct the contribution directly from the income on your tax return. If you are at least age 50, you may contribute up to $3,500. If you are covered by your employer's pension plan, the contribution is only fully deductible if your modified adjusted gross income is below $40,000. If you are married filing a joint return and both of you are covered by a pension plan, your contributions are fully deductible only if your modified adjusted gross income is below $60,000. The deductible contribution is reduced or eliminated as your income increases. If you and your spouse both work and one of you is not covered by a pension plan, the income limits for fully deductible contributions are different for each of you. If you are not covered by a pension plan, any contribution up to $3,000 ($3,500 if age 50 or older) is deductible from your income regardless of the amount of earnings. All distributions from deductible traditional IRAs are taxable.

Nondeductible Traditional IRA
If you are covered by a pension plan, depending on your filing status and modified adjusted gross income, all or part of your traditional IRA contribution may be nondeductible. Form 8606, Nondeductible IRAs, must be completed each year a nondeductible IRA contribution is made. When a distribution is received, Form 8606 is used to determine how much of the distribution is taxable.

Roth IRA
This IRA was first available in 1998 and is subject to most of the rules of the original (traditional) IRAs. The Roth IRA also allows you to contribute up to $3,000 a year ($3,500 if age 50 or older) but there is no deduction from your income for the contribution. Qualified distributions are not taxable. Once your modified adjusted gross income reaches $95,000 ($150,000 if Married Filing Jointly), your allowable contribution begins to be reduced.

Generally, you must be in a Roth IRA for at least five years and be over age 59½ to take a distribution from a Roth IRA without being assessed a 10% additional tax.

Finally, there is an option available to taxpayers with an adjusted gross income of less than $100,000 to convert their traditional IRAs to a Roth IRA. In the year the conversion is made, you must pay taxes on all of the distribution you convert, except any existing nondeductible contributions.

Spousal IRA
If your spouse does not work and you do, you may set up an IRA for each of you and contribute up to $3,000 per person per year into each IRA ($3,500 if age 50 or older). The nonworking spouse is considered to be not covered by a pension plan in determining deductibility of the IRA contributions.

Deemed IRA
If you have a qualified plan through your employer that maintains a separate account and you make voluntary contributions to that account, the account is deemed a traditional IRA or Roth IRA if the account otherwise meets the requirements of a traditional IRA or Roth IRA.

IRA Withdrawals
Any funds withdrawn before age 59½ from a traditional or a Roth IRA will be subject to a 10% additional tax. Some exceptions to this additional tax are: