Questions

What is an IRA?

Individual Retirement Accounts (IRAs) are an essential tool to help you save for your years of retirement. In addition, they provide you an immediate benefit: deducting your contributions from your income tax return, up to a maximum set by law.

Who is eligible to open an IRA account?

Any person who has not reached yet seventy five (75) years of age who receives "compensation" that is, income from wages, salary, professional services, occupational income, selling commissions, tips or self-employment from sources within Puerto Rico and who is a resident of the Commonwealth of Puerto Rico. Compensation does not include interests, dividends, rents, royalties, income from child support or capital earnings or any other income that does not come from employment.

How much can be deducted as contribution to an IRA account?

The maximum amount that can be deducted for tax year 2009 is the lesser of $5,000 or the adjusted gross income of the taxpayer, which can be attributed to professions and occupations of both spouses, even if only one of the spouses is employed. In the case of married couples who file a joint Puerto Rico income tax return, the maximum amount that can be deducted in your joint income tax return is the lesser of $10,000 or the combined adjusted gross income gained from to professions or occupations of both spouses, even if only one of the spouses is employed. Contributions by each spouse must be made to separate accounts.

What is the final date in which I can contribute to my IRA account for tax year 2009?

Contributions to an IRA account for tax year 2009 must be made not later than April 15, 2010, or the date in which the taxpayer files his income tax return for that particular year (including any extension applicable to file).

What is the tax relief in my income tax return by contributing to an IRA account?

The amount you pay in taxes will be reduced when you open an IRA account depending on the amount of the contribution and your tax rate. The following table presents several examples:

IRA Contribution	Tax rate	Reduction
$5,000	7%	$350
$5,000	10%	$500
$5,000	15%	$750
$5,000	28%	$1,400

When can a person begin to receive the accumulated amount in an IRA account?

A person can begin to receive the amount accumulated in an IRA account upon reaching sixty (60) years of age without a Treasury Department penalty. However, that disbursement must begin no later than the year the taxpayer reaches seventy five (75) years of age.

Can a person begin to receive the accumulated amount in an IRA account before reaching sixty (60) years of age?

A person may receive a disbursement from an IRA account at any moment. However, if done before reaching sixty (60) years of age, as a general rule, that person is subject to a 10% penalty imposed by the tax code.

Are there exceptions to the 10% penalty for receiving a disbursement before reaching 60 years of age?

Yes. The penalty does not apply if the disbursement is made:

• as a consequence of death,
• disability,
• to the person or a family member until the fourth degree of consanguinity or second of affinity that has a severe, chronic, degenerative, and terminal disease;
• unemployment (as defined in the tax code),
• because the person will use the amount to be disbursed to pay for certain expenses relating to the university studies of a direct dependent of the person,
• for the purchase or construction in Puerto Rico of the person's first main home
• to repair or rebuild the main home that has been affected by fire, hurricane, earthquake or any other natural cause,
• to avoid imminent foreclosure or arrears on the mortgage of the person first main home due to the loss of employment or verifiable substantial reduction in income,
• for the purchase of a computer (maximum withdrawal of $1,200), for a dependent up to the second degree of consanguinity and who is pursuing studies up to the university level. This withdrawal may be made once every six years.

In addition, the 10% penalty does not apply if the amount to be distributed is rolled over by the person to another IRA account of that person in a transfer within 60 days of receiving the disbursement or if the disbursement is not otherwise included in the gross income. In general, the 10% penalty will be retained from a disbursement, unless the person provides satisfactory evidence to the bank that the legal requirements for the exception have been met.

How will I receive the funds from my disbursement?

The IRA may be disbursed in a lump sum; in semimonthly, monthly, quarterly semiannual or annual payments in equal or substantially equal amounts.

Can I receive disbursements only of the accumulated interest in my IRA account?

No. IRA account disbursements include principal (amount contributed by the person) and accumulated interest.

I am 60 years old and I began to receive accumulated income from my IRA accounts. How do I report this income in my income tax return for 2009?

The amount received or disbursed from an IRA account will be reported as ordinary income in the tax year in which the beneficiary received the disbursement. The amount included as income shall be equal to the disbursement received, less the portion of exempt income included in said disbursement.

In the event that part of the disbursement comes from interests gained from certain accounts, the taxpayer may opt to pay 17% tax, by authorizing the payer to retain said taxes over the total amount of this disbursement on or before the moment of the disbursement.

My IRA account gained totally exempt interests. Do I have to report these disbursements of my IRA account in my income tax return?

Yes. From the amount you received or was disbursed, the portion corresponding to principal must be included as ordinary income. However, the portion corresponding to exempt interests are excluded from your income tax return, and therefore, you do not have to report it.

Are taxes paid over interests earned in an IRA account?

Depending on the type of IRA chosen, interest earned may be taxable or exempt. However, you will pay taxes over IRA funds and the taxable interest earned only in the year in which the withdrawal of funds takes place and only for the amount of the withdrawal.

When I was a resident of Puerto Rico, I opened an IRA account. Now I am a resident of the United States and I received a disbursement from my IRA in Puerto Rico. Do I have to pay taxes on this income in Puerto Rico?

If you receive income from IRA accounts opened in Puerto Rico, even if you are no longer a resident of Puerto Rico, this income is taxable in Puerto Rico. For the United States, we suggest you consult your tax advisor to evaluate your specific case.

What happens to my IRA account if I die?

If there is no conflict with any other law, you can name a beneficiary to continue receiving the payments in the event of your death. If no beneficiary has been named, the balance in your account will be part of your estate.

If your IRA account is canceled because of death, there will be no cancellation penalties coming from the Department of the Treasury.

To withdraw funds because of death, these are the required documents:

• Death Certificate
• Declaration on Heirs or Will (certified by the court, after the death occurs, as being the last one granted by the depositor),
• Letters testamentary certifying the executor's authority, when applicable, and
• Copy of the authorization for the withdrawal of funds, certified by the Department of the Treasury, that includes the following:
  • Tax payment receipt over the estate of the deceased, or
  • Certified copy of the release from the payment of taxes.

I retired and would not like to withdraw the funds in my retirement plan with the company. Can I rollover these funds to an IRA account?

Yes. The law allows the rollover of these funds to an IRA account through a rollover directly from the fiduciary who manages the company's retirement plan to the fiduciary who manages the IRA account to which the roll over will be made. You can also receive the disbursement and contribute it to an IRA account within sixty (60) days from receiving said payment or disbursement.

Do I have to begin to withdraw my money from an IRA account at a particular age?

Yes. The law requires that you begin to withdraw your funds not later than the calendar year in which you turn seventy five (75).