Experience the Difference in Hometown Banking
- Introduction
- Contribution Rules and Restrictions
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- Permitted Distributions
 Introduction |
IRA Contribution Rules & Restrictions |
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Congress, in its infinite wisdom, established limits to IRA contributions. Those limits basically prevent people who can afford retirement plans from having a really good IRA.
A contribution is new money deposited into an IRA. It is not old IRA money that is moved (rolled over) from an existing plan elsewhere.
$5,000 is the maximum contribution limit for the tax year 2012 for most individuals. People who turn 50 in the year of contribution are allowed to contribute an additional $1000, which puts their limit at $6000.
For example, individuals under age 50 who contribute $5,000 to a Roth IRA in tax year 2012 have reached their IRA contribution limit. They cannot contribute more to any type of Traditional or Roth IRA.
Qualified Employer Plans, such as a 401(k), and CESA's have separate contribution limits and are not combined with IRA contributions.
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Contribution Limits By Tax Year |
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For Traditional, Spousal and Roth IRA Plans (CESA limits addressed in a separate module).
| Tax Year | Normal Contribution Limits | Catch-up amount for those Age 50 and above | Total Contribution Limit for those Age 50 and above | ||
|---|---|---|---|---|---|
| 2006-07 | $4,000 | $1,000 | $5,000 | ||
| 2008-09 | $5,000 | $1,000 | $6,000 | ||
| 2010 + | $5,000 + COLA in $500 increments | $1,000 | $6,000 + COLA in $500 increments | ||
* COLA: Cost of Living Adjustment
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Contribution Timing |
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The curtain may fall on a particular tax-year on December 31, but not on IRA contributions. The government extends the window of opportunity for IRA contributions until the tax filing deadline in April. For example, if you fail to make a tax-year 2012 contribution to their IRA before December 31, you still have through the tax filing deadline in April 2013 to make a tax year 2012 contribution.
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Ownership Restrictions |
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Lower Age Limit: There is no minimum age requirement for IRA eligibility. Any person under 70½ with earned income may open an IRA and contribute new money.
Minors: The fact that a person must have earned income prevents many minors from opening an IRA. However, individuals under 18 with earned income (defined on the next page) may open an IRA without a parent or guardian at SBSU.
Upper Age Limit: This is where it gets complicated. Individuals cannot make contributions to a Traditional or Spousal IRA in the year they reach age 70½ or beyond. In other words, the person must be younger than 70½ during the entire year. This limit on contributions does not apply to Roth IRAs. A person may contribute to a Roth IRA so long as he has earned income. Note that this rule applies only to contributions of new money. A person 70½ or older may open an IRA and roll old IRA money into it from elsewhere regardless of age.
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Earned Income - Don't Earn Too Little |
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An individual must have earned income to make contributions to any type of IRA. Earned income includes wages, tips, salaries, professional fees, bonuses, taxable alimony, net profit from self-employment and other. It is usually associated with having a job and receiving a paycheck. Individuals may contribute up to their earned income, or maximum contribution limit (discussed previously), whichever is less. In other words, a person with $1,200 in earned income for the year may contribute $1,200 maximum to her IRA.
Earned income does not include interest, dividends, most rental income, pension or annuity income, deferred compensation, and disability income. Individuals cannot use gift money to open an IRA. They must earn it by having a job or receiving taxable alimony.
It's not the bank's responsibility to determine your eligibility or tax deductibility. If you have questions, please consult a qualified financial advisor.
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Earned Income - Don't Earn Too Much |
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IRA contributions become less attractive (Traditional) or prohibited (Roth) if an individual makes too much money.
Traditional IRA: There is no earned income limit. Anyone may contribute to a Traditional IRA regardless of income and receive the corresponding tax deduction, including millionaires. The only exception comes into play when an individual participates in a retirement plan at work, such as a 401(k). If he earns too much money, he can't deduct his IRA contribution from his income when he files taxes. He may still contribute, but it will be with dollars that he cannot deduct.
Spousal Traditional IRA: A Spousal IRA follows the same rules as a Traditional IRA, except that a non-working spouse may contribute tax-deductible dollars to her IRA even if her working spouse is enrolled in a retirement plan at work, such as a 401(k). The earnings limitation is above $150K, which allows many non-working spouses to qualify for the tax deduction.
Roth IRA - Possibly Prohibited: This would be the perfect investment vehicle for all people - rich or poor - were it not for the income restrictions. A person who makes too much money is prohibited from contributing to a Roth IRA. Too bad, as this is a great way to contribute after-tax dollars to a fund that may never be taxed again regardless of how large it grows.
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Traditional IRA |
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Anyone with earned income may contribute to a Traditional IRA and get a tax deduction. The only exception is the individual who participates in a Qualified Employer Plan (QEP), such as a 401(k), and earns too much money. This person may still contribute to a Traditional IRA but will forfeit the full tax deductibility that usually accompanies it. Tax deductibility is based on Modified Adjusted Gross Income (MAGI), and phases out as income increases. MAGI is basically income from all sources with a few adjustments. The next few charts assume an IRA owner is covered by a retirement plan at work and wants to contribute to an IRA. The difference between the following charts depends upon the tax filing status used by the person, single, joint, or married but filing separately.
Single Filers Enrolled in an Employer's Plan - MAGI Limitations by Tax Year:
| Tax Year | Full Deduction MAGI Below | Partial Deduction MAGI at or Between | No Deduction MAGI Above | ||
| 2008 | $53,000 | $53,000 - $63,000 | $63,000 | ||
| 2009-10 | $55,000 | $55,000 - $65,000 | $65,000 | ||
| 2011 | $56,000 | $56,000 - $66,000 | $66,000 | ||
| 2012 | $58,000 | $58,000 - $68,000 | $68,000 |
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Traditional IRA |
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This chart applies to married persons who are both working and both covered by retirement plans at work. Each may contribute to their respective IRAs and get a tax deduction if their combined income is less than shown on the table.
Married, Joint Filers each Participate in an a QEP - MAGI Limitations by Tax Year:
| Tax Year | Full Deduction MAGI Below | Partial Deduction MAGI at or Between | No Deduction MAGI Above | ||
| 2008 | $85,000 | $85,000 - $105,000 | $105,000 | ||
| 2009-10 | $89,000 | $89,000 - $109,000 | $109,000 | ||
| 2011 | $90,000 | $90,000 - $110,000 | $110,000 | ||
| 2012 | $92,000 | $92,000 - $112,000 | $112,000 |
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Traditional IRA |
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This chart applies to a person who files a married filing separately tax return and who participates in a QEP. Note that the IRS makes it almost impossible to contribute tax-deductible dollars in this situation because the limit is ridiculously low.
A person may still make traditional IRA contributions regardless of income and regardless of participation in a QEP. It will be with dollars, however, that cannot be deducted from income on a tax return.
Married, Separate Filers with a Spouse Enrolled in an QEP - MAGI Limitations by Tax Year:
| Tax Year | Full Deduction MAGI Below | No Deduction MAGI at or Above | ||
| 2002 + | $10,000 | $10,000 | ||
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Spousal IRA – One Partner Enrolled in QEP |
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The chart on this page applies to the non-working spouse of an employed person who is covered by a retirement plan at work. The Spousal IRA allows income from the employed person to pass to an IRA in non-employed spouse's name and still qualify for a tax deduction.
Married Filing Jointly, one Spouse Enrolled in an QEP - MAGI Limitations:
| Tax Year | Full Deduction MAGI Below | Partial Deduction MAGI at or Between | No Deduction MAGI Above | ||
| 2009-10 | $166,000 | $166,000 - $176,000 | $176,000 | ||
| 2011 | $169,000 | $169,000 - $179,000 | $179,000 | ||
| 2012 | $173,000 | $173,000 - $179,000 | $179,000 | ||
The partial contribution is up to the individual to calculate with a qualified tax advisor.
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Income Restrictions Illustrated - Roth IRA |
Permitted Distributions |
Individuals who earn too much money cannot contribute to a Roth IRA. Participating in another retirement plan at work is not the issue here. It is strictly earned income that makes the individual ineligible. See the tables below for the income limits for Roth contributions depending upon tax-filing status. MAGI is basically income from all sources less a few adjusting factors. Refer to a qualified tax advisor or financial planner if the situation is not clear-cut.
Single Filers - MAGI Limitations - Roth IRA
| Tax Year | Full Deduction MAGI Below | Partial Deduction MAGI at or Between | No Deduction MAGI Above | ||
| 2009-10* | $105,000 | $105,000 - $120,000 | $120,000 | ||
| 2011 | $107,000 | $107,000 - $122,000 | $122,000 | ||
| 2012 | $110,000 | $110,000 - $125,000 | $125,000 | ||
Married Filing Jointly - MAGI Limitations - Roth IRA
| Tax Year | Full Deduction MAGI Below | Partial Deduction MAGI at or Between | No Deduction MAGI Above | ||
| 2009-10* | $166,000 | $166,000 - $176,000 | $176,000 | ||
| 2011 | $168,000 | $168,000 - $179,000 | $179,000 | ||
| 2012 | $173,000 | $173,000 - $183,000 | $183,000 | ||
* Income limits for conversions to Roth IRA are phased out in 2010. In other words, a high-income earner may get around MAGI limits by contributing after-tax dollars to a traditional IRA and then coverting it to a Roth. Tax consequences of 2010 conversions in may be divided between 2010 and 2011
How much may the partial contribution be? See a tax advisor.
