Individual retirement accounts provide a temporary tax shelter for your retirement nest egg because you do not have to pay taxes on your earnings until you make withdrawals from the account. You can grow your money even faster by depositing funds into your IRA on a pre-tax basis. However, rules exist that both limit IRA contributions in general and your ability to deduct these contributions from your taxable earnings.
IRA contributions are subject to annual contribution limits. As of 2012, people under 50 can make annual contributions of up to $5,000 into IRA accounts, while people over that age can contribute up to $6,000. Your contribution cannot exceed the lesser of these age-based caps and your taxable income for the year. Significantly, the contribution cap applies to both your traditional IRA contributions and your after-tax Roth IRA contributions. If you are under the age of 50 and deposit $5,000 into your Roth, then you cannot put any money into a traditional IRA during the same tax year.
Contributions to traditional IRAs are fully tax-deductible if you are single and do not have access to a retirement plan like 401(k) through your employer. If you are married, you can make a full tax-deductible contribution to a traditional IRA if neither you nor your spouse has access to a retirement plan through employers. If you are married but file your taxes separately, as of 2012, you cannot make a tax-deductible contribution if your adjusted gross income exceeds $10,000. As of 2012, you can make a full non-deductible IRA contribution even if your spouse has access to a retirement plan at work as long as your AGI does not exceed $173,000.
As a single taxpayer as of 2012, your IRA contributions are tax-deductible if you have access to an employer-sponsored retirement plan but an AGI of $58,000 or less. You can make a partially tax-deductible contribution if your AGI does not exceed $67,999. If you file jointly and you have access to a retirement plan at work, then your contributions are tax-deductible if your AGI does not exceed $92,000. You can make a partially deductible contributions as a married person filing jointly if your AGI falls below $112,000.
You are responsible for keeping track of your taxable and non-taxable contributions to your IRAs. If you co-mingle pre- and after-tax contributions then the entire amount inside the account becomes fully taxable. If you keep the contribution types separate, then you do not have to pay taxes on your return of principal from your non-deductible contributions. The earnings on both your deductible and non-deductible traditional IRA contributions are fully taxable and subject to a 10 percent premature withdrawal penalty if accessed prior to you reaching the age of 59 1/2.
- Internal Revenue Service: Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: IRA Deduction Limits
- Internal Revenue Service: 2012 IRA Contribution and Deduction Limits - Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work
- Internal Revenue Service: 2012 IRA Contribution and Deduction Limits - Effect of Modified AGI on Deductible Contributions if You are NOT Covered by a Retirement Plan at Work
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