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.

Maximum IRA Contributions: 

Unlike earnings on IRA accounts -- which are not taxed until withdrawn -- the IRA contribution itself may or may not be deductible from your taxable income.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. 

2008 Tax Year

For 2008, 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 adjusted gross income (AGI) is:

• More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifying widow(er), 
• More than $53,000 but less than $63,000 for a single individual or head of household, or 
• Less than $10,000 for a married individual filing a separate return.

For 2008, if you are not covered by a retirement plan at work, your deduction for contributions to a traditional IRA may be reduced (phased out) if you either live with your spouse at any time during 2008 or file a joint return for 2008.

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 AGI is more than $159,000 but less than $169,000.

If your AGI is $169,000 or more, you cannot take a deduction for contributions to a traditional IRA.

Source:  IRS.gov