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The federal government established Individual Retirement Arrangements (IRAs) to encourage people to save for retirement. Depending on the type of arrangement, you or your employer (depending on the type of IRA), may set up the IRA at a financial organization such as a financial services firm, bank, credit union, or savings and loan institution.

IRAs allow you to invest your money and let it grow tax deferred, and in some cases tax free. Deferring the payment of taxes on your earnings is a tremendous advantage to you because all of the money that would have been paid as taxes can continue to grow in your retirement plan year after year.


This booklet provides an overview of the various types of IRAs and how you might use them to build financial freedom. It is not intended to give specific tax advice. You should consult your tax professional regarding your own individual situation. Depending upon your circumstances, you might elect to set up any of the following five Individual Retirement Arrangements:

Traditional IRAs contributions may be tax-deductible (your IRA contribution deduction may be reduced or eliminated if you or your spouse is an active participant in a qualified employer retirement plan and your modified adjusted gross income for your filing status exceeds certain thresholds for the year). Tax-deductible contributions will be deducted yearly and will not be taxed on the money invested—or the gains on that money—until you withdraw the funds, usually at retirement. Non-deductible contributions are also permitted. If you withdraw funds before age 59½, a 10 percent tax penalty may apply. Withdrawals will be taxed as ordinary income.

Roth IRA contributions are made with after-tax dollars, meaning you cannot deduct them from taxable income. Withdrawals are generally free of income tax, provided you withdraw Roth IRA funds after the qualified distribution 5-tax-year holding period and satisfy one of the other requirements (e.g., withdrawals occur on or after the Roth IRA owner reaches age 59 1/2 or the owner's death).

Spousal IRA contributions can be made for a spouse who does not work or does not have sufficient compensation (or earned income).

Education IRA (now referred to as a Coverdell ESA) contributions made with after-tax dollars will grow tax-deferred in an education savings account for an under-18 beneficiary and distributions for qualified education expenses are tax-free.

IRA-Based Employer Retirement Plans. In addition to IRA plans that an individual might set up, some employers may have established IRA-based retirement plans for employees. Employer contributions to these plans enhance retirement savings at no cost to the employee. IRA-based employer retirement plans offered by some employers include the Simplified Employee Pension plan (SEP-IRA) and the Savings Incentive Match Plan for Employees (SIMPLE IRA).



A Traditional IRA allows you to contribute up to $5,000 ($6,000 if you’re age 50 or older) annually in 2012. In 2013 it is $5,500 ($6,500 if you’re age 50 or older).* If your earned income is less than this maximum, you may contribute up to the full amount of your earned income. The annual contribution has periodic cost-of-living increases. Note that the IRS has made provisions for people age 50 and older to “catch up” by increasing their annual contribution.** See "Catch-Up" Contributions below.

Are My Contributions Tax-Deductible?

Your contributions to a Traditional IRA are fully tax deductible regardless of your income provided that neither you nor your spouse participate in a qualified employer retirement plan (e.g., a 401(k) plan). If you participate in such a retirement plan, your filing status and modified adjusted gross income will be the determining factor.

If you are not an active participant in a qualified retirement plan, but your spouse is, you will be able to deduct your Traditional IRA contribution as long as your jointly filed Modified Adjusted Gross Income (MAGI) in 2012 is $173,000 or less. If your MAGI is greater than $173,000, but less than $183,000, your deduction is reduced. If your MAGI is $183,000 or more, you cannot take a deduction for a contribution to a Traditional IRA.

If a married individual is an active participant in a qualified retirement plan, there is a full deduction if MAGI is $92,000 or less; reduced deduction if MAGI is more than $92,000 but less than $112,000; and no deduction if $112,000 or more.

If a married couple is filing separately and either the IRA owner or his/her spouse is an active participant there is no full deductible. There is reduced deduction if MAGI is more than $0, but less than $10,000; and no deduction if MAGI is $10,000 or more.

If you are an active participant in a qualified retirement plan, file as a single, and your 2012 MAGI is any amount, you can take a full deduction up to the amount of your contrbution limit. 

Withdrawals from a Traditional IRA

Withdrawals, sometimes called distributions, from Traditional IRAs are generally subject to ordinary income tax. If you make withdrawals prior to age 59½, however, you may be subject to an additional 10 percent early withdrawal penalty. The 10 percent penalty may not apply if you:

  • Die or are disabled (as defined by federal tax law)
  • Incur deductible medical expenses
  • Are unemployed and use withdrawals to pay for health insurance premiums
  • Make withdrawals to cover qualifying higher education expenses
  • Use up to $10,000 for a qualifying first-time home purchase

Also, check with your tax advisor for other exemptions that might apply to your specific situation.

Withdrawals (distributions) from these IRAs are taxed as ordinary income. You must begin taking withdrawals no later than April 1 of the year following the year in which you turn 70½. The withdrawal amount each year must meet yearly Minimum Required Distribution (MRD) amounts. If you do not begin withdrawals at that time, you may incur serious tax penalties. See your tax professional for further information on calculating your MRD.

You can change your beneficiary at any time. Additionally, upon your death, your spouse may be able to treat the IRA as his or her own or roll over his or her inherited interest in your IRA to his or her own IRA, thus allowing your spouse to take distributions and pay taxes over time. Non-spouse beneficiaries cannot treat the IRA as their own but they can generally take distributions over their life expectancy in accordance with the after-death required minimum distribution rules.

*This regular, annual contribution limit applies in the aggregate to all the IRAs and Roth IRAs of which the individual is the owner. You cannot contribue to a traditional IRA after age 70 1/2. 



Because contributions to a Roth IRA are made with after-tax dollars, withdrawals from a Roth IRA are generally free of income tax. You can contribute to a Roth IRA as long as your earned income is below max modified adjusted gross income limitations. Like a Traditional IRA, you are permitted to contribute up to $5,000 annually to a Roth IRA in 2012 ($6,000 if you’re age 50 or older), plus catch-up contributions.* If you earn less than this amount, you cannot contribute more than 100 percent of your earned income. You should note that if you contribute to both a Roth IRA and a Traditional IRA, your total contributions are not permitted to exceed the permitted amount.

Your annual Roth IRA contribution may be limited if your income exceeds certain amounts. If you file a joint return, you may make the full contribution provided your Modified Adjusted Gross Income (MAGI) is $173,000 or less in 2012. If you file as a single, the Modified Adjusted Gross Income limit to make a full contribution is $110,000 or less in 2012. For incomes above this limit, the allowable contribution phases out gradually. Check with your tax professional to see if you are eligible to contribute to a Roth IRA.

Married individuals who file separately cannot make a full contribution but can make a reduced contribution, if MAGI is more than $0, but less than $10,000; and no contribution if MAGI is $10,000 or more.

Traditional IRAs have mandatory withdrawal starting no later than April 1 of the year after you turn age 70½, but Roth IRAs have no minimum distribution requirements during the Roth IRA owner's life. Generally, Roth contributions can be withdrawn income tax free. You may incur a 10 percent penalty on earnings if you withdraw your earnings before age 59 1/2 and none of the other exceptions apply (see "Withdrawals from a traditional IRA" in "Traditional IRAs" for a list of some of the potential exceptions).

Conversion from Traditional to Roth

Because funds withdrawn from a Roth IRA are not usually taxed (depending on your situation) you may elect to convert all or part of a Traditional IRA to a Roth IRA.** In general the converted amount (excluding non-deductible contributions) is included in your income in the year distributed or treated as distributed from your non-Roth IRA or qualified retirement plan. Legislation enacted in 2006 allows you to convert to a Roth IRA starting in 2010, regardless of your income level or filing status,  if the converted amount is distributed (or treated as distributed) from your non-Roth IRA or qualified retirement plan in 2010, the taxable amount can be included in your income equally over 2011 and 2012.

The decision to convert an existing Traditional IRA to a Roth IRA is an individual one. The amount converted from a Traditional IRA will be taxed as ordinary income. You must weigh several factors, including your current tax rate, what your tax rate may be in retirement, and your income now and in the future. You also need to consider whether or not you are able to pay the increased tax burden for the year the taxable amount converted is includable in your income. Consult with your financial advisor and an independent tax advisor to determine if converting your Traditional IRA to a Roth IRA is right for you. This opportunity may not be right for everyone. The cost of paying taxes now may outweigh the benefit of income tax-free qualified distributions in the future. For conversions involving annuity contracts, the taxable amount may be more than you would otherwise expect because it may be based on more than just your account value. The state income tax treatment of your conversion and subsequent distributions may vary depending on your state of residence.

** While the tax laws do allow for partial conversions, some IRA providers may have restrictions on partial conversions. You should check with your provider to see if there are any such restrictions on partial internal or external conversions.



If you file a joint return and your spouse does not work or does not have sufficient compensation (or earned income) to be eligible to contribute to an IRA, you can fund a Traditional or Roth IRA for your spouse. To be eligible to fund a Spousal IRA, the following requirements must be met:

  • The couple must be married
  • At least one spouse must have sufficient compensation or earned income
  • A federal tax return must be filed
  • An IRA must be established for the non-compensated spouse
  • The recipient of the Spousal IRA must be under age 70½
  • For a Roth IRA, Modified Adjusted Gross Income is less than $177,000

If you meet the eligibility rules, the spousal contribution is the same as for a Traditional IRA, up to $5,000 annually in 2012 for all IRAs and Roth IRAs of which the taxpayer is the owner. The spousal contribution is made to the non-compensated spouse’s IRA while the compensated spouse follows the regular IRA rules for his or her own contribution to a separate IRA. The Traditional IRA contribution may be fully tax deductible if you and your spouse are not active in an employer-sponsored plan or if you are covered (but your spouse is not), your joint Modified Adjusted Gross Income is $173,000 or less (for 2012). For more information concerning the active participant limits, see "Are my contributions tax-deductible" in the "Traditional IRAs" section.  As with a Traditional IRA, your maximum deductible amount will be phased out when your joint income exceeds these amounts.



In general for each beneficiary under the age of 18 (and special needs beneficiaries of any age), you can contribute up to $2,000 a year (except in the case of rollover contributions) to an Education IRA, now referred to as a Coverdell Education Savings Account. You may make tax-free withdrawals from the Education IRA to pay for qualified elementary, secondary, and college expenses. You will not be penalized, and the distributions will not be taxed, if the withdrawal is used for tuition, fees, books, special needs services, or room and board.

As with a Roth IRA, your contributions are made with after-tax dollars and you will not receive a tax deduction. You can contribute for each beneficiary until they turn 18 unless the beneficiary is a special needs beneficiary. If you file jointly, the $2,000 limit is phased out when your income exceeds $190,000. If you file as single, it is phased out starting at $95,000.

Distributions that are not used for qualified educational expenses are subject to ordinary income tax on the earnings portion and an additional 10 percent penalty may apply. Any balance remaining in an Education Savings Account must be distributed within 30 days after the beneficiary reaches age 30 or dies. No distribution is required if the Education Savings Account is transferred to a surviving spouse or other family member under the age of 30 due to the death of the beneficiary.




A Simplified Employee Pension plan (SEP-IRA) is a plan that allows an employer to make contributions toward an employee’s retirement (or his or her own, if self-employed). Used mostly by sole proprietorships or small businesses, SEPs generally allow employers to contribute a maximum of 25 percent of an employee’s compensation, or $50,000 in 2012, whichever is less. If you are self-employed, the maximum contribution is based on net profit from the business, not gross income. SEP-IRAs are subject to most of the Traditional IRA rules and regulations (e.g., investment and distribution rules).

Money contributed to an employee's SEP-IRA belongs to the employee as soon as it is contributed. Employees are, within limits, able to exclude the entire SEP contribution from current income. Employers are not, however, required to make minimum contributions, so an employee cannot be sure of the amount an employer will contribute from year to year. However, if the employer makes a contribution, the contribution must be made for all eligible employees based on a written allocation formula that bears a uniform relationship to compensation and does not discriminate in favor of highly compensated employees.  If the employee leaves the company, all SEP contributions can be taken with the employee.


A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan maintained by an employer with no more than 100 employees who earned at least $5,000 for the preceding calendar year. The SIMPLE IRA permits you to make contributions under a qualified salary-reduction agreement. Your employer must match your contribution on a dollar for dollar basis up to a maximum of three percent of your annual compensation (or a lower percentage of at least 1% if certain requirements are met), or make non-elective contributions of two percent of your annual compensation. If you are an eligible employee, you may contribute up to $11,500 in 2012 and $12,000 in 2013.

For example, if you make $25,000 a year and decide to contribute five percent of your earnings ($1,250) through salary reduction, and your employer makes a matching contribution of three percent ($750), the total contribution to your SIMPLE IRA would be $2,000. If you are 50 or older in 2012, you may make an additional “catch-up” contribution. See “Catch-Up” Contributions below.

SIMPLE IRA plans are taxed the same as Traditional IRAs; generally, contributions are not taxable until withdrawn. As with all forms of IRAs, tax penalties may be imposed if you withdraw funds from a SIMPLE IRA before you are age 59 1⁄2, including a 25 percent penalty if withdrawals are made during the first two years from the date you first participated in any SIMPLE IRA plan maintained by the same employer. There are also restrictions on what type of account you can roll a SIMPLE IRA into during the first two years from the date you first participated in any SIMPLE IRA plan maintained by the same employer..



When you retire or change jobs, you may be faced with the decision about what to do with your qualified retirement plan assets. A number of options may be available to you, including rolling over the distribution to a Traditional IRA, or leaving the assets with your former employer, if permitted. By moving eligible rollover distribution assets to an IRA (or other qualified plan), or leaving the assets with your former employer, your money can continue to grow tax-deferred until you begin withdrawing it, when it will be taxed as ordinary income.

If you do not roll the assets over, and decide to take the funds as a lump sum, there are some disadvantages to this option to consider, including:

  • Mandatory 20 percent tax withholding
  • Possible 10 percent premature distribution penalty if you are under age 59½
  • Ordinary income taxes due currently on the taxable portion of the entire distribution.

Your distribution assets can be rolled into a newly opened IRA or one that you already own. You may also be able to roll the assets to a new employer's plan if the plan accepts such rollovers. See a tax professional, financial advisor, or benefits specialist for more information on rollover IRAs and other qualified plan distribution options.



The IRS has made provisions for individuals  50 years of age and older to make catch-up contributions to their Traditional, Roth, Spousal, or SIMPLE IRA plans. For example, as shown in the following table, if you are age 50 or over and contribute the maximum of $5,000 to your Roth IRA in 2012, you may also contribute an additional $1,000 as a catch-up contribution, bringing your total 2012 contribution to $6,000.

The IRS has made provisions for individuals 50 years of age and older to make catch-up contributions to their Traditional, Roth, Spousal, or SIMPLE IRA plans. For example, as shown in the following table, if you are age 50 or over and contribute the maximum of $5,000 to your Roth IRA in 2012, you may also contribute an additional $1,000 as a catch-up contribution, bringing your total 2010 contribution to $6,000.

Year Traditonal, Roth, or Spousal IRA Maximum ContributionCatch-Up Limit SIMPLE IRA Maximum ContributionSIMPLE Catch-Up Limit


The laws about Individual Retirement Arrangements are meant to encourage individuals to save. By becoming more familiar with IRA rules, you’ll be better able to make the right IRA choices for yourself. The sooner you do, the larger your IRA is likely to grow, and you’ll be on your way to building financial freedom. If you think an IRA might be a good retirement vehicle for you, consult a tax professional or financial advisor for information relevant to your specific situation.



IRS Publications

#590, Individual Retirement Arrangements

FAQs regarding IRAs,,id=111413,00.html

FAQs regarding SIMPLE IRA Plans,,id=111420,00.html


Any discussion of taxes is for general informational purposes only and does not purport to be complete or cover every situation. MetLife, its agents and representatives may not give legal, tax or accounting advice and this document should not be construed as such. You should confer with your qualified legal, tax and accounting advisors as appropriate

MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances.

This web site, as well as any recommended reading and reference materials mentioned, is for general informational purposes only. It is issued as a public service and is not a  substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information.

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