Retirement Planning Common Questions |
What are the rules for IRA contributions?
Answer:
It depends on what kind of IRA you're talking about. Traditional IRAs and Roth IRAs are each subject to different contribution rules.
You're allowed to contribute up to $4,000 a year to a traditional IRA in years 2005-2007, as long as you're under age 70½ and you have earned income. In addition, if you're age 50 or older, you can make an extra "catch-up" contribution of $1,000 ($500 in 2005). You can make your annual contribution up to April 15 of the following year, either in a series of payments or in one lump sum. The beauty is that practically anyone who has a paying job can set up and contribute to a traditional IRA. Also, if you meet certain conditions, you may be able to contribute an additional $4,000 a year to an IRA in your spouse's name. However, whether or not you can deduct your traditional IRA contributions will depend on several factors, such as your income, your tax filing status, and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion, or none of your contribution for a given year. You may even qualify for a partial tax credit (the credit is available to certain taxpayers through tax year 2006).
Roth IRAs are in some ways the opposite of traditional IRAs. Contributions to Roth IRAs are never tax deductible, but a tax credit may be available and qualifying distributions will be tax free. Also, even though the same $4,000 cap on yearly contributions applies to Roth IRAs, not everyone will qualify to take full advantage of a Roth IRA. The amount you can contribute to a Roth IRA (if anything) will be based on your income and filing status. If you do qualify, you may be able to continue contributing to a Roth IRA after age 70½ – a feature traditional IRAs don't offer. As with traditional IRAs, you may be able to contribute an additional $4,000 a year on behalf of your spouse. However, your contribution to a Roth IRA for any tax year must be reduced by contributions made to other IRAs during the same year. Your combined annual contribution to all of your IRAs – Roth and traditional – cannot exceed $4,000.
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Common Questions
- Can I avoid the 10 percent penalty tax for early withdrawals from a traditional IRA?
- Can I convert my traditional IRA funds into a Roth IRA?
- Can I set up a traditional IRA?
- I need money--can I take funds from my IRA?
- It's January, and I forgot to contribute to my IRA. Is it too late?
- Should I withdraw money from my IRA to pay for my child's college tuition?
- What are my options if I inherit an IRA or employer-sponsored plan?
- What are required minimum distributions and how are they calculated?
- What are the rules for IRA contributions?
- What's a premature IRA distribution, and what happens if I make one?
- Can I roll a retirement plan distribution into an IRA?
