An IRA is an Individual Retirement Account that provides several tax benefits.
This article will focus on the Traditional IRA. Please refer to the related links for information about the other types of IRAs available.
The Traditional IRA was introduced more than 20 years ago and enables individuals to save money in a tax-deferred account. What that means is that the earning from your IRA account earnings will not be taxed until you begin taking money out of the account. Each year, regardless of your income, you can invest up to the maximum annual contribution limit (see table below) or 100% of your earned income, whichever is less. IRA accounts can be comprised of fixed income instruments, such as CDs/share certificates and bonds, and stocks and mutual funds, to name just a few options.
Unlike earnings on IRA accounts -- which are not taxed until withdrawn -- the IRA contribution itself may or may not be deductible from your taxable income. Tax deductibility of contributions depends on your income and if you or your spouse participate in a workplace retirement plan.
If neither you nor your spouse is an "active participant" in an employer-sponsored retirement plan, you both may deduct your entire contribution, up to your applicable limit as established by the IRS. The W-2 Form you receive each year from your employer should indicate whether or not you're considered an active participant. Check with your employer if you're unclear about your status.
However, if either you or your spouse participates in an employer-sponsored retirement plan, you may deduct your contribution only if your adjusted gross income falls within certain ranges.
2010 Combined Traditional and Roth IRA Contribution Limits
If you are under 50 years of age at the end of 2009: The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2009. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).
If you are 50 years of age or older before 2010: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2009. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.
2009 Tax Year
For 2009, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:
More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),
More than $55,000 but less than $65,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.
If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $166,000 but less than $176,000. If your modified AGI is $176,000 or more, you cannot take a deduction for contributions to a traditional IRA.
2010 Tax Year
For 2010, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:
More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),
More than $56,000 but less than $66,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.
For 2010, if you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $167,000 but less than $177,000. If your modified AGI is $177,000 or more, you cannot take a deduction for contributions to a traditional IRA.
Conversions to Roth IRAs. Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are eliminated.Also, for any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would be included as income will be included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010.
For additional details, see the related links below.
Source: IRS.gov
