A taxpayer must coordinate contribution limits for traditional IRAs and Roth IRAs. The maximum total yearly contribution that an individual can make to all individual IRAs is the lesser of the individual’s taxable compensation for the year (this does not include rollovers), or the following amounts:

The law allows taxpayers to contribute to a Roth IRA after age 70¹/₁.

An excess contribution is an amount contributed to the taxpayer's Individual Retirement Arrangement (IRA) in excess of the amount of compensation for the tax year, or the IRA contribution limit that applies to the taxpayer for that year. Refer to IRM 21.6.5.4.3, Excess Contributions Tax, IRM 21.6.5.4.6.1, Contribution Limits, and IRM 21.6.5.3.1, Traditional Individual Retirement Arrangement (IRA), for information about contribution limits. Excess contributions are subject to 6% tax under IRC 4973.

The maximum yearly contribution that a taxpayer can make to a Roth IRA is phased out based on modified adjusted gross income (MAGI) and filing status as follows:

Qualified distributions from a Roth IRA are not includible in gross income and are not subject to 10% tax on early withdrawals.

A qualified distribution is any payment or distribution from a Roth IRA that is made at least five years from the beginning of the year in which the taxpayer first set up and contributed to a Roth IRA, and the distribution is:

Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for more information on qualified distributions.

The five-year holding period is satisfied if Roth distributions (including distributions allocable to conversion contributions) are not made before the end of the five-tax year period beginning with the first tax year that the taxpayer contributed to a Roth IRA.

As with other IRAs, a taxpayer can make a regular contribution for a year if it’s made by the due date for filing a tax return for the year, without regard to extensions. In this case, the five-tax-year holding period begins with the tax year for which a contribution is first made to a Roth IRA. A subsequent contribution does not start a new five-year period.

Nonqualified distributions may be includible in gross income. Contributions are withdrawn tax-free. Earnings are included in gross income and may be subject to 10% tax on early withdrawals. Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for more information on nonqualified distributions from a Roth IRA.

Distribution of a Roth conversion amount within five years of the conversion may cause the 10% additional tax on early distributions to be imposed, even if the amount distributed is not includible in gross income. Refer to Pub 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub 590-B for more information.

When evaluating nonqualified distributions from a Roth IRA:

The minimum distribution rules applying to other IRAs generally do not apply to Roth IRAs while the owner is alive.

However, after the death of a Roth IRA owner, certain minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs. Refer to Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), for more information.

When transferring assets from a qualified plan, traditional IRA or Roth IRA:

For tax years beginning before January 1, 2018, taxpayers can reverse (“recharacterize”) a conversion of a traditional IRA to a Roth IRA. The taxpayer may recharacterize the conversion contribution by the due date (including extensions) of the tax return for the tax year during which they made the contribution. Refer to Pub 590-A for more information.

Effective for taxable years beginning after December 31, 2017, a conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, cannot be recharacterized.

Before a beneficiary reaches age 30, the balance in a Coverdell Education Savings Account may be transferred or rolled over into another Coverdell Education Savings Account for the beneficiary or a member of the former beneficiary’s family (including the beneficiary's spouse) who is under age 30. This age limitation does not apply if the new beneficiary is a special needs beneficiary. Refer to Pub 970, Tax Benefits for Education, for more information.

Transfers upon death or divorce to a spouse/member of the beneficiary’s family under age 30 are generally not taxable and the spouse or family member treats the account as their own.

Certain colleges and universities may sponsor prepaid tuition programs under IRC 529. States may sponsor both prepaid and savings programs. Refer to Pub 970, Tax Benefits for Education, for more information.

IRC 529 requires that a qualified tuition program sponsored by an eligible educational institution (defined in IRC 481 of the Higher Education Act of 1965: 20 USC 1088) must hold amounts in a qualified trust and have received a ruling or determination from the IRS that the qualified tuition program meets the applicable requirements.

A taxpayer may contribute to both a Coverdell Education Savings Account and to a IRC 529 Program in the same year. Refer to Pub 970 for more information about QTP.

Qualified higher educational expenses include expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious institution. In the case of a IRC 529 program, qualified higher education expenses also include expenses for fees, books, supplies, and equipment required for participation in an apprenticeship program registered and certified with the Secretary of Labor; and, up to $10,000 paid as principal or interest on qualified student loans. Refer to IRC 530(b)(2)(A)(i) and IRC 529(e)(3) that further define qualified higher educational expenses which can be paid with funds from a Coverdell Education Savings Account or a IRC 529 program.

A portion of the earnings included in a distribution that exceeds the amount of qualified education expenses in excess of the distribution, is included in gross income and is subject to a 10% additional tax, unless an exception applies. This additional tax is reported on Part II, Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

Beginning in 2004, a distribution from a QTP established and maintained by an eligible educational institution (generally private colleges and universities) can be excluded from income if the amount distributed is not more than qualified educational expenses. For more information on tax-free QTP distributions, refer to Chapter 8 in Pub 970.

The Military Family Tax Relief Act of 2003 exempts the additional 10% tax for withdrawals from IRC 529 QTP accounts for non-educational use, because of attendance at United States service academies (i.e., U.S. Military Academy, U.S. Naval Academy, U.S. Air Force Academy, U.S. Coast Guard Academy, or the U.S. Merchant Marine Academy).

Taxpayers may roll over distributions received after December 22, 2017 and rolled-over before January 1, 2026, to an ABLE account, without penalty or income tax, within 60 days of distribution. The designated beneficiary of the ABLE account must be the same as the designated beneficiary of the QTP, or a family member of the designated beneficiary of the QTP. The amount of any rollover is limited to the amount that, when added to all other contributions to the ABLE account, does not exceed the IRC 529A(b)(2)(B)(i) limit for the year, i.e., the annual gift tax exclusion amount under IRC 2503(b). If the amount of the rollover causes contributions to exceed the limit, the distributee must include the excess rollover amount in their gross income.

Division T of the Consolidated Appropriations Act, 2023, , known as the SECURE 2.0 Act of 2022, amended IRC 529 as of December 31, 2023, to provide for a special rollover that is treated as a tax-free distribution (in the form of a trustee-to-trustee transfer) for certain amounts from a designated beneficiary’s QTP to their Roth IRA. The QTP must have been maintained for at least 15 years as of the date of such distribution and the distribution does not exceed the aggregate amount contributed to the QTP (and attributable earnings) before the 5-year period ending on the date of the distribution. The amount of any special rollover is limited to the IRC 408A(c)(2) Roth IRA contribution limit and an aggregate limit of $35,000.

The Balanced Budget Act of 1997 allows eligible individuals to establish a Medicare Advantage Medical Savings Account (MSA), IRC 138. The federal Medicare program administers MSAs. Refer to Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information on Medicare Advantage MSAs.

Medicare Advantage MSA distributions are reported on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Section B, Medicare Advantage MSA Distributions.

To qualify for a Medicare Advantage MSA, individuals must:

Only Medicare makes contributions to a Medicare Advantage MSA. These contributions and the earnings are not taxable while in the account.

If an account holder uses distributions for expenses other than qualified medical expenses, the distributions are taxable, and may be subject to an additional 50% tax. Taxpayers must file Form 8853 with their tax return if they have a Medicare Advantage MSA. Refer to Pub 969 for more information.

A taxpayer must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, if during the tax year, they or their spouse (if filing joint):

Taxpayers use Section B, Medicare Advantage MSA Distributions, to report Medicare Advantage MSA Distributions, figure taxable distributions and additional tax.

Taxpayers use Section C, Long-Term Care (LTC) Insurance Contracts, to report Long-Term Care Insurance contracts.

Within limits, contributions to an Archer MSA are:

The taxpayer or spouse may not contribute to an Archer MSA if the employer made any contributions (Form W-2, Wage and Tax Statement, Box 12 with Code R).

The deduction is limited to:

Taxpayers can make contributions for a particular tax year until the due date (without regard to extensions) of the individual income tax return for that year.

The Archer MSA deduction is the smallest of:

The taxpayer is taxed on all distributions received in the tax year from all Archer MSAs to the extent the distributions were not used for qualified medical expenses of the account holder, his spouse, or dependents.

Distributions not for medical expenses are also subject to an additional 20% tax unless made:

The taxpayer may rollover a distribution (withdrawal) of assets from one Archer MSA into another Archer MSA or health savings account (HSA). Generally, a taxpayer must rollover the distribution within 60 days following the distribution for the distribution to qualify as tax-free.

Form 8853, Section A, Part II, is used for computing any taxable distributions and the additional tax.

Taxpayers report Medicare Advantage Medical Savings Account (MSA) distributions on Form 8853, Section B.

The taxpayer does not make contributions to a Medicare Advantage MSA account. Part B of title XVIII of the Social Security Act governs contributions (Medicare makes contributions to the account).

The taxpayer is taxed on distributions received in the tax year to the extent the distributions were not used for unreimbursed qualified medical expenses.

Distributions not for unreimbursed qualified medical expenses are also subject to an additional 50% tax to the extent they reduce the prior year account balance below an established floor unless made after the account holder:

The law permits Trustee-to-Trustee transfers of Medicare Advantage MSA accounts.

Taxpayers must file a separate Form 8853, with Section B completed, for each spouse if both spouses received distributions from a Medicare Advantage MSA.

The taxpayer must complete Form 8853, Section C, if the taxpayer (policyholder) or spouse (if filing jointly) was a policyholder who received payments made on a per diem or other periodic basis under a qualified LTC insurance contract or received certain accelerated death benefits on a per diem or other periodic basis.

The taxpayer must file a separate Form 8853, Section C, for each insured person for whom the taxpayer received payments.

Taxpayers report any taxable benefits on Form 8853, Section C, Line 26 and on Form 1040, U.S. Individual Tax Return, Form 1040-SR, U.S. Tax Return for Seniors, or Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Beginning tax year 2020 and subsequent years, taxpayers report taxable benefits on Line 8 of Schedule 1, Additional Income and Adjustments to Income, and attach to Form 1040, Form 1040-SR or Form 1040-NR.

The individual owning the proceeds of the qualified LTC contract must report the income for tax purposes, regardless of whether the payment is assigned to a third party.

Taxpayers exclude from income amounts paid as reimbursements for qualified LTC services under a qualified LTC contract.

Taxpayers can fully exclude from income amounts paid as accelerated death benefits if the insured has been certified by a physician as terminally ill. These amounts are excludable, to the same extent they would be if paid under a qualified LTC insurance contract, if the insured has been certified by a licensed health care practitioner as chronically ill.

An eligible individual can establish a Health Savings Account (HSA). An eligible individual (for any month) is:

Generally, an HDHP is a health plan that meets certain requirements for deductibles and out-of-pocket expenses.

The table below lists the annual deductibles and maximum out-of-pocket expenses, including deductibles, co-payments, and other amounts and not including premiums.

For a Health Savings Account (HSA) established by an employee, the employee, the employee’s employer or both may contribute to the HSA of the employee in a given year.

For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA.

Family members may also make contributions to an HSA on behalf of another family member or any other person if that other family member is an eligible individual.

The maximum annual contributions for individuals (and their spouses covered under the high deductible health plan (HDHP)) age 55 and older at the end of the tax year, are as follows:

After an individual is enrolled in Medicare, contributions (including catch-up contributions) cannot be made to an individual’s HSA.

HSA contributions made by an eligible individual, a family member, or any other person on behalf of an individual, are:

For calendar year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made.

Distributions from a Health Savings Account (HSA) used exclusively to pay for qualified medical expenses of the account beneficiary, or their spouse or dependents, are excludable from gross income. A taxpayer may use the amounts in an HSA for qualified medical expenses and exclude them from gross income even if they are not currently eligible for contributions to the HSA.

Qualified medical expenses are expenses incurred after the HSA has been established and paid by the account beneficiary, their spouse, or dependents for medical care as defined in IRC 213(d) but only to the extent the expenses are not covered by insurance or otherwise.

For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under IRC 213.

Health insurance premiums are not considered qualified medical expenses except for the following:

Any amount of the distribution not used exclusively for qualified medical expenses of the account beneficiary, spouse or dependents is includible in gross income of the account beneficiary and is subject to an additional 20% tax on the amount includible in income.

Taxpayers use Form 8889, Health Savings Accounts (HSAs), Part II, HSA Distributions, to compute the taxable amount of the HSA distribution. Taxpayers include the taxable amounts in the total amount reported on Line 8 of Schedule 1 and attach to Form 1040. Taxpayers are instructed to enter "HSA" and the amount on the dotted line next to Line 8. For tax year 2020, taxpayers include the additional tax, if applicable, on Line 8 of Schedule 2, and attach to Form 1040, Form 1040-SR or Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Taxpayers are instructed to enter "HSA" and the amount next to Line 8. Beginning in tax year 2021, taxpayers include the additional tax, if applicable, on Line 17c of Schedule 2, and attach to Form 1040, Form 1040-S, or Form 1040-NR.

If the account beneficiary is no longer an eligible individual (e.g., entitled to Medicare benefits, or no longer exclusively has an HDHP), they can continue to exclude distributions used exclusively to pay for qualified medical expenses from their gross income.

Upon death, any balance remaining in the account beneficiary’s HSA becomes the property of the individual named in the HSA as the beneficiary of the account.

The law authorizes any state to offer its residents the option of setting up an ABLE account.

The account owner and designated beneficiary of the account is the disabled individual. In general, a designated beneficiary can have only one ABLE account at a time, and must be disabled before their 26th birthday.

Eligible individuals may establish an ABLE account in any state. This allows individuals to set up ABLE accounts and choose the state program that best fits their needs (i.e., investment options, fees, and account limits).

Total annual contributions to an ABLE account are limited to the annual gift tax exclusion amount. The annual gift tax exclusion for 2019-2021 was $15,000, for 2022 it was $16,000, for 2023 it is $17,000, and for 2024 it is $18,000. Distributions of earnings are tax-free if used to pay qualified disability expenses.

Qualified disability expenses are related to the designated beneficiary’s blindness or disability and help that person maintain or improve health, independence and quality of life. For example, they can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other disability-related expenses.

The ABLE Act allows a state to establish and maintain a new type of tax-advantaged savings program (under IRC 529A of the Internal Revenue Code). States use the following two information returns:

These forms are not available on CC IRPTR. If the taxpayer has questions concerning the Form 1099-QA or the Form 5498-QA, direct them back to the state where they established their ABLE account. The state where the ABLE account was established issues the forms to the taxpayers. Refer to the Pub 907, Tax Highlights for Persons With Disabilities, for additional information.

The following Individual Retirement Account File (IRAF) Filing History Codes display on IMF entity:

Use abstract numbers with any Individual Retirement Account File (IRAF) MFT 29 tax adjustment. See IRM 21.6.5.4.11.7, Individual Retirement Account File (IRAF) Tax Adjustments, for information on input of adjustments with abstract numbers. Valid item Abstract Numbers are:

The TC 29X amount must equal combined Abstract Numbers 160, 162, 233, 235, 236, 237, and 238 amounts.

Input adjustments to Individual Retirement Account File (IRAF) MFT 29 modules as Non-Source Document (NSD) adjustments. Since all information/forms are scanned into CII, there is no need for source document adjustments.

Use blocking series (BS) 00 on all IRAF adjustments except in the following specific cases:

Do not use any SC or RC when adjusting MFT 29 IRAF accounts. Source codes (SC) and reason codes (RC) cannot post to MFT 29 IRAF accounts. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

The input of a TC 971 AC 144 on a MFT 30 module generates a corresponding MFT 29 module for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. The TC 971 AC 144 is input using CC REQ77.

The IRS permits Installment Agreements (IA) and Direct Debit Installment Agreements on MFT 29 modules.

Systemically generated refunds, TC 846, occur on MFT 29 modules using the same programming process as MFT 30 systemic refunds.

If a Form 1040-X, Amended U.S. Individual Income Tax Return, is received and the additional tax is for the Form 5329, but no Form 5329 is attached, correspond with the taxpayer either by phone or Letter 1803C, IRA/Retirement Plan Inquiry, requesting the Form 5329.

The following conditions require establishing an MFT 29 module if one does not currently exist:

Follow these procedures to establish an MFT 29 module with the input of a TC 971 AC 144 on an MFT 30 account:

Use extreme caution when inputting these transactions. The MFT 29 module (with a TC 150) may have been established based on previous input of a dummy Form 1040 with a Form 5329 sent through processing. A subsequent TC 290 and IRAF abstract numbers (based on input of TC 971 AC 144) will also post. This would create a duplicate assessment.

An Individual Retirement Account File (IRAF) adjustment or credit transfer will not post unless an entity is established on the IRAF for a particular module.

An IRAF entity is established when a Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, posts as a TC 150 and is updated when a later return posts.

The additional 10% tax is adjusted on the IMF account for:

No adjustment is made to the IRAF (MFT 29) account.

Determine if the 10% tax is included in the posted IMF (MFT 30) tax.

If a loose Form 5329 with Part I or Part II completed is received, research the account (both accounts for MFJ taxpayers) to determine if the income and tax are reported on the return. If no return on file, send the taxpayer Letter 282C, Return Not Received; Copy Requested/Received, and advise them that a Form 1040, U.S. Individual Income Tax Return, is required to be filed with the Form 5329. If the income and tax are reported on the return, then determine if an adjustment is needed. If there is no filing requirement to file an income tax return, prepare a dummy return and send it with the Form 5329 for processing. See IRM 3.11.3.35.2, Loose Form 5329, for further instructions.

If the income on the Form 5329, Parts I or II is included as income on the tax return, make the adjustment to include the 10% tax.

Consider changes to income tax and/or the 10% tax.

Determine if an IMF tax adjustment is needed.

Adjust the additional tax (excise tax) on excess contributions to Traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, and ABLE Accounts from Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, on the IRAF, MFT 29.

Adjust the additional tax on excess accumulation in qualified retirement plans (including IRAs) from Form 5329, Part IX, on the IRAF, MFT 29.

When adjusting the tax:

For the blocking series, refer to IRM 21.6.5.4.11.3, Individual Retirement Account File (IRAF) Blocking Series and Source Documents.

Do not use any source codes (SC) or reason codes (RC) when adjusting MFT 29 IRAF accounts. Source codes (SC) and reason codes (RC) cannot post to MFT 29 IRAF accounts. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

Do not enter a correspondence date when adjusting MFT 29 accounts.

The refund generates from the MFT 29. Do not move the payments back to the MFT 30 to refund.

Transfer a remittance for IRAF, if necessary, using CC ADD/ADC 24. Refer to IRAF credit transfers in IRM 21.6.5.4.11.8, Individual Retirement Account File (IRAF) Credit Transfers.

Transfer any additional credit using CC ADD/ADC24.

Overpayments refund from IRAF (MFT 29) accounts. A TC 846 will systemically generate and post to IRAF (MFT 29) modules, providing freeze code conditions preventing a refund are not present. Offsets to any outstanding liabilities also apply to IRAF. Take the following action to transfer a payment from IRAF to IMF when applicable:

Send Letter 1803C, IRA/Retirement Plan Inquiry, to the taxpayer to explain the actions taken.

If the credit was applied to the Unidentified or Excess Collection file, prepare documentation to move the payment to the IRAF account. Refer to IRM 21.5.7.3.5, Researching Unidentified Remittances and Excess Collection File, for more information.

Internal IRAF Notices generate to notify the campus that additional action or review of the IRAF module (MFT 29) may be necessary.