IRS Publication 590

Introduction

IRS Publication 590, divided into two parts—590-A and 590-B—provides detailed guidelines and rules regarding Individual Retirement Arrangements (IRAs) in the United States. These documents are essential for taxpayers, financial advisors, and tax preparers as they navigate the complexities of IRA contributions, distributions, taxation, and exceptions. Below, we delve into various aspects covered by IRS Publication 590, providing a comprehensive overview of IRAs.

IRS Publication 590-A: Contributions to Individual Retirement Arrangements

What is IRS Publication 590-A?

IRS Publication 590-A focuses on the rules and guidelines surrounding contributions to IRAs. This includes Traditional IRAs, Roth IRAs, and various specific IRA-related plans.

Key Topics Covered

1. Traditional IRAs:
   • Contribution Limits: As of 2021, individuals can contribute up to $6,000 per year, or $7,000 if they are aged 50 or older.
   • Eligibility: Anyone under the age of 70½ with earned income can contribute to a Traditional IRA.
   • Deductibility: Depending on income level and participation in employer-sponsored retirement plans, contributions may be tax-deductible.
2. Roth IRAs:
   • Contribution Limits: Roth IRA contributions are subject to the same $6,000/$7,000 limit.
   • Income Limits: Eligibility to contribute is phased out for higher-income earners.
   • Tax Treatment: Contributions are made with after-tax dollars, and qualified distributions are tax-free.
3. Catch-Up Contributions:
   • Individuals aged 50 and over can make additional contributions, providing an avenue for those behind in their retirement savings to catch up.
4. Employer and Self-Employed Plans:
   • Simplified Employee Pension (SEP) IRAs: Targeted at small businesses and self-employed individuals, SEPs have different contribution limits and rules.
   • SIMPLE IRAs: Savings Incentive Match Plan for Employees (SIMPLE) IRAs allow both employee and employer contributions.

Calculations and Tax Impact

IRS Publication 590-A also includes worksheets and examples to help individuals calculate the maximum allowable contributions and potential tax deductions.

IRS Publication 590-B: Distributions from Individual Retirement Arrangements

What is IRS Publication 590-B?

IRS Publication 590-B deals with the rules related to distributions, withdrawals, and the taxation thereof from IRAs.

Key Topics Covered

1. Traditional IRA Distributions:
   • Required Minimum Distributions (RMDs): Starting at age 72 (previously 70½), account holders must begin taking RMDs. Failure to do so results in hefty penalties.
   • Tax Treatment: Distributions are generally taxed as ordinary income.
   • Penalties: Early withdrawals (before age 59½) may incur a 10% penalty, with certain exceptions.
2. Roth IRA Distributions:
   • Qualified Distributions: Distributions are tax-free if the account has been open for at least five years and the account holder is 59½ or older (or in certain other qualifying situations).
   • Non-Qualified Distributions: These may be subject to taxes and penalties, depending on the source of the funds (contributions vs. earnings).
3. Exceptions to Early Withdrawal Penalties:
   • First-Time Home Purchase: Up to $10,000 can be withdrawn penalty-free.
   • Higher Education Expenses: Qualified educational costs for oneself, spouse, or dependents.
   • Substantially Equal Periodic Payments: A series of payments over an individual’s life expectancy.

Reporting and Record-Keeping

The publication provides guidance on how to accurately report distributions on tax returns and the importance of maintaining meticulous records to comply with IRS rules.

Emerging Topics and Updates

The rules and limits around IRAs can change with new legislation. Recent trends include the impact of the SECURE Act, which altered several key aspects of IRAs:

• Increase in RMD Age: As mentioned, the age for beginning RMDs was raised from 70½ to 72.
• Contributions Beyond Age 70½: The rule prohibiting Traditional IRA contributions beyond age 70½ was eliminated, allowing older workers to continue contributing if they have earned income.

Resources and Contact Information

For detailed information, you can visit the IRS website and access the full text of Publication 590-A and 590-B:

• Publication 590-A (Contributions to Individual Retirement Arrangements)
• Publication 590-B (Distributions from Individual Retirement Arrangements)

These documents are updated annually and include the latest legal changes, limits, and guidelines essential for retirement planning and compliance.