Contributions to Individual Retirement Accounts
Income and Contribution Limits for Roth and Traditional IRAs in 2009
May 1, 2009
Saving for retirement should be one of the most important priorities in life. How early the contributions begin and the overall performance of the investments will decide whether a person's retirement years are going to be the golden years of his life or not.
Individual Retirement Arrangements or IRAs provide a tax-deferred(as in the case of a traditional IRA) or a tax-free(in the case of Roth IRA) account to save for retirement. In a traditional IRA the contributions may be tax-deductible and the earnings grow tax-free. Taxes are paid only at the time of distributions(withdrawals) from the account. In a Roth IRA, the contributions are not tax-deductible but the earnings as well as the contributions grow tax-free and are not taxed at the time of withdrawal.
Generally a person need to have qualifying income or be married to someone who has qualifying income, in order to contribute to an IRA account. For the year 2009 , the maximum amount that a person can contribute to his IRA is $5000 ($6000 for people aged 60 and older).
Income and Contribution Limits for Traditional IRAs
A person can contribute to both traditional and Roth IRA in the same year, although the maximum amount that can be contributed is limited by the overall limit for contribution that is set for that particular year. For example for the year 2009 the maximum contribution permitted to an IRA (both traditional and Roth) is $5000(for people below 50). If a person contributes $5000 to his traditional IRA, then he cannot make any contributions to his Roth IRA in 2009.
- A person loses the ability to make a contribution to traditional IRA when he reaches the age 701/2.
- There is no income limit for contribution to a traditional IRA
- Contributions to a retirement plan maintained by his employer does not affect a person's ability to contribute to a IRA account. However in a traditional IRA this may reduce the amount of contribution that is tax-deductible.
- All the contributions have to be made in cash.
Income and Contribution Limits for Roth IRAs
In order to make contributions to a Roth IRA, the Modified Adjusted Gross Income(MAGI) of a person should be below certain limits set by the IRS. The income limits for the year 2009 are,
a) For married individuals who file jointly the modified adjusted gross income (MAGI) should be below $166,000 to be eligible to make the full contribution. Between $166,000 and $176,000 the amount that can be contributed is proportionately reduced and becomes zeroonce the MAGI is $176,000.
b) For single individuals, the Roth IRA phase-out limits are $105,000 and $120,000 for 2009. When the Modified Adjusted Gross Income exceeds $120,000 the amount that can be contributed becomes zero.
There is no age limit for contributing to a Roth IRA, even a 90 year old person can contribute to a Roth IRA. Required Minimum Distribution rules that apply for traditional IRAs do not apply for Roth IRAs.
As in the case of a traditional IRA, all the contributions to a Roth IRA must be made in cash.
Qualifying Income for IRA Contributions
The following income can be considered as qualifying income:
- Income earned as an employee - this includes wages, salaries, tips, bonuses, commissions and similar amounts. According to IRS, Form W-2 can be used as a reference for calculating the qualified income. Qualified income is the amount in the box labeled 'Wages, tips and other compensation' minus the amount in the box labeled 'Non-qualified plans.'
- Net Earnings from Self-Employment- Qualified income also includes income that is subjected to self-employment tax. For the income to be qualifying income, a person needs to be actively involved in the business that produces the income, he cannot merely be an investor.
- Alimony Income- Taxable alimony income can be considered as qualified income but this does not include nontaxable items such as child support.
Contributions to an IRA for a particular year can be made between January 1st of that year till the due date for tax return for that year (which is usually April 15 of the next year). Contributions made between Jan 1st and the due date for the tax return can be for the current year or for the previous year, so proper care must be taken to indicate the correct year for the contribution in the form.
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