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IRA Contribution Rules

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Contributing to an Individual Retirement Account — or IRA — is an easy process, and most American taxpayers are eligible to open an IRA of one sort or another. However, because IRA accounts are tax advantaged, the Internal Revenue Service does place limits on contributions.

What are the IRA contribution rules? To begin, there are two basic varieties of IRA: a regular IRA and a Roth IRA. Both kinds of IRA grow tax free, but a regular IRA allows most contributors to deduct the amount of their contribution from that year’s income, for tax purposes, and only the eventual withdrawals are taxed (as regular income). Contributions to Roth IRAs, on the other hand, are not tax deductible. However, eventual withdrawals from a Roth account are entirely tax free. Basically, a regular IRA gives you an up-front tax break; a Roth IRA gives you a tax break at the back end.

IRA Contribution Rules

IRA Contribution Rules

What are the IRA contribution rules for a regular IRA? Anyone with taxable income can open a regular IRA account and contribute on an annual basis. However, annual contributions are limited to the maximum amount of one’s earned income, or $5,000,whichever amount is smaller. For example, if you only earned $4,500 in earned income during 2012, you can only contribute $4,500 to a regular IRA for the year. If, on the other hand, you earned $325,000 in earned income during the year, you can contribute the full $5,000.

Taxpayers aged fifty or more can make an additional $1,000 annual “catch-up” contribution, for a total contribution of $6,000, again provided that earned income is at least that amount. A taxpayer aged fifty or more who earned $5,300 during the year could only contribute $5,300 to his IRA, but a taxpayer the same age who earned $175,000 during the year could contribute the full $6,000.

Contributions to Roth IRAs are subject to the same limits; the only difference is, Roth contributions are never tax deductible, whereas for most investors, contributions to regular IRAs are deductible. However, Roth contributions are subject to additional restrictions, based on one’s modified adjusted gross income (MAGI). For married taxpayers filing jointly, if the MAGI is less than $173,000, both spouses can make the full contribution of $5,000 (or $6,000 for those over fifty), provided that joint earned income is greater than the total amount of the contributions. Both spouses don’t need to contribute to earned income; the nonearning spouse can contribute to a “spousal IRA.”

For example, if a couple in their fifties filing jointly has a MAGI of at least $12,000 but less than $173,000, both can open (or contribute to existing) Roth IRAs in the full amount of $6,000 each.

Couples with MAGIs between $173,000 and $183,000 can contribute a reduced amount to their Roth IRAs, on a sliding scale; couples earning more than $183,000 cannot contribute to their Roth IRAs.

Single taxpayers

Single Taxpayers

Single taxpayers have lower limits. A single taxpayer must earn less than $110,000 (MAGI) to be able to make the full contribution to a Roth IRA. Earnings from $110,000 to $125,000 allow partial contributions, on a sliding scale; singles earning $125,000 or more cannot contribute to a Roth.

Note that these figures apply to tax year 2012; they are adjusted annually by the IRS, depending on inflation statistics. Be sure to check with the IRS’s website for current limits, if later than 2012. But almost all Americans can contribute to an IRA of one flavor or another, and given the tax advantages, it’s almost always worthwhile.

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IRA Calculator

IRA Calculator will help you determine:

IRA calculator helps you decide whether a Traditional or Roth IRA is best suited for your needs.

How much you need to withdraw each month once you retire to live comfortably
How much you need to contribute each month to maximize employer contribution for monthly retirement withdrawal goal
How you can forecast for your contributions’ affect on your retirement savings can be done through our online 401-K calculator.