An Individual Retirement Account, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRAs cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year and you, or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self–employment. In addition, taxable alimony and separate maintenance payments received by an individual are treated as compensation for IRA purposes.

Compensation does not include earnings and profits from property, such as rental income, interest and dividend income or any amount received as pension or annuity income, or as deferred compensation.

The most you could contribute to your traditional IRA for 2001 was the smaller of $2,000 or your taxable compensation for the year. For 2002, the $2,000 was increased to $3,000 or if you were 50 or older, $3,500. Keep in mind that contributions on your behalf to a traditional IRA reduce your limit for contributions to a 'Roth IRA'. If neither you nor your spouse is covered by a qualified retirement plan at any time during the year, your allowable contributions to a traditional IRA will be fully deductible.

If you, your spouse, or both of you are covered by a qualified retirement plan, your IRA deduction may be reduced or eliminated, depending on the amount of your income and your filing status.

If you and your spouse file a joint return and your spouse is under age 70 1/2 at the end of the year, you may be able to make a contribution to a separate spousal IRA. For 2001, your total contribution to both your IRA and your spouse's IRA was limited to the smaller of $4,000 or your combined taxable compensation. You could not contribute more than $2,000 to either IRA for 2001.

The deadline for making a contribution to a traditional IRA for the year is the due date of your return, not including any extensions of time to file, normally April 15th.

You may choose to take the deduction on a return filed before the contribution is actually made, provided you make the contribution by the due date of that return, not including extensions.

Amounts you withdraw from your IRA are fully or partially taxable in the year you withdraw them. If you made only deductible contributions, withdrawals are fully taxable. If you made any non–deductible contributions, withdrawals are partially taxable.

Amounts you withdraw before you reach age 59 1/2 may be subject to a 10% additional tax. You also may owe an excise tax if you do not begin to withdraw minimum distribution amounts by April 1st of the year after you reach age 70 1/2.

If you are 70 1/2 and would like to reduce the amount of your distribution you might consider a multi-generational IRA.

Special Distribution Rules of IRA's and Roth IRA after 2000

Confused which is best for you, a Roth IRA or a traditional IRA, click below.

Traditional IRA VS Roth IRA?