Who can contribute to a Traditional or Roth IRA and what are the income and age limits?

We often get questions about Qualified plans since we focus on retirement planning. This post is focuses on contributions to an IRA or a Roth IRA.

Contributions to IRAs

If you (or your spouse) earn taxable income and are under age 70 ½, you can contribute. It's that simple.

However, determining whether your contributions are tax deductible depends on your income and if you have access to a work-related retirement account. 

Here are the guidelines for 2010:

·         If you have no retirement plan at work and you're younger than 70 ½, you can contribute (up to the annual contribution limit) and deduct the entire amount from your taxable income. If your spouse doesn't work outside the home, he or she can also invest up to the federal limit and deduct the full amount, so long as your combined earned income is $89,000 or less.

·         If you participate in a 401(k) or other retirement plan at work, your contribution can fully deductible only if your adjusted gross income (AGI) is less than $89,000 for a married couple filing jointly or $56,000 for an individual.

·         If you have a workplace retirement plan, the deduction for your traditional IRA contribution is phased out completely when your AGI is $109,000 or over for married couple filing jointly. The limit is $66,000 for individual, or $10,000 for a married person filing separately.

·         If you're not covered by a workplace plan but your spouse is, your contribution is fully deductible if your combined income is less than $167,000 and gets phased out at $177,000 or more.

·         A 6% excise tax is imposed each year on excess contributions to an IRA.   Similar rules apply to a Roth IRA.                                   

   

Contributions to Roth IRAs

Any individual can make annual nondeductible contributions to a Roth IRA in amounts up to $5,500 for 2015 and an additional $1,000 for those 50 and older, or 100% of compensation, if lower, reduced by the amount of contributions for the tax year made to all other, but not reduced by contributions to a SEP or SIMPLE.

The allowable contribution phases out over the following levels of modified adjusted gross income (AGI):

·         The phase out if your spouse and you file jointly is for 2015, $183,000 to $193,000

·         For married persons filing separately, $0 to $10,000 for 2015

·         Single taxpayers and heads of household phase out for 2015 is$116,000 to $131,000

A $200 contribution can be made if the phase-out lowers the contribution limit to under $200 but more than $0.

AGI for purposes of the Roth IRA contribution phase-out is defined as it is for traditional IRA purposes except that it excludes income resulting from the conversion from a traditional IRA to a Roth IRA Roth.

Advisor Observation: Modified AGI based contribution limits for Roth IRAs apply whether or not the taxpayer is a participant in a qualified retirement plan.

Roth IRA contributions for a year must be made by the un-extended tax return due date for the contribution year.                                                           Unlike traditional IRAs, contributions are permitted after age 701/2.

Only one tax-free rollover contribution can be made to a Roth IRA during any one-year period. 

This post is not meant as an offer to sell or an offer to buy any financial product and is meant to educate only. Always consult with a financial advisor and\or CPA whenever making financial decisions or contemplating issues involving tax law.