The federal tax code provides valuable tax breaks for individual retirement accounts to encourage people to put money away for their retirement. But Congress’ generosity isn’t unlimited, so the Internal Revenue Service sets maximum annual ceiling limits on IRA contributions. The ceilings are different for traditional, Roth, SEP and SIMPLE IRAs. The IRA contribution ceilings can also be affected by income and a taxpayer’s other retirement income.
A traditional tax-deferred IRA allows you to deduct contributions from income during your working years, but withdrawals at retirement will be taxed as ordinary income. As of publication, working people can contribute up to $5,000 a year, or $6,000 for people more than age 50. But the amount of the contribution they can deduct on their tax return will depend on income and whether they are covered by an employer’s retirement plan. Those who can’t take a full contribution deduction because of income can still make nondeductible contributions to their traditional IRA up to the $5,000/$6,000 limit.
Single filers not covered by an employer retirement plan can deduct all their contributions to their traditional IRA regardless of income. Joint filers with no employer plan get a full deduction if income is below $173,000. They get a gradually decreasing deduction if income is between $173,000 and $183,000 and no deduction if income exceeds $183,000. Single filers covered by an employer’s retirement plan get a full deduction with income below $58,000, a decreasing deduction for income between $58,000 and $68,000 and no deduction when income exceeds $68,000. For joint filers under an employer’s plan, the limits are $92,000 for a full deduction and $92,000 to $112,000 for a decreasing deduction. There’s no deduction if income exceeds $112,000. Married couples filing separately but who lived together get no deduction if income is above $10,000, regardless of whether they were under an employer’s retirement plan.
The Roth IRA doesn’t offer a tax deduction for contributions during your working years but will provide tax-free income at retirement. Most working people can contribute up to $5,000 a year, or $6,000 a year for those exceeding age 50. But higher-income people have a lower contribution limit or will be ineligible to contribute anything at all. As of 2012, single filers can make a full contribution if income is below $110,000. The ceiling gradually lowers for income between $110,000 and $125,000. Singles can’t contribute anything if income exceeds $125,000. For joint filers the limits are $173,000 for a full contribution and $173,000 to $183,000 for a reduced contribution. They are ineligible to contribute to the Roth if income exceeds $183,000. Married taxpayers filing separately but who lived together are ineligible to contribute anything to a Roth if income exceeds $10,000.
The SEP IRA is a type of IRA for small businesses and self-employed people. It has the highest contribution limit of all IRA types. As of publication, the business owner can contribute up to $50,000 or 25 percent of salary, whichever is less, to himself and to each employee through a subtraction from salary. If the SEP IRA terms allow additional out-of-pocket contributions from employees, they are limited to $5,000 if under age 50 and $6,000 if more than age 50, less any contributions the employee made out of pocket to any other IRA. Employer and employee SEP contributions are tax deductible. An owner or employee who participates in more than one salary-subtraction IRA plan can’t contribute more than $17,000 collectively to all plans.
SIMPLE IRAs are a type of employer-sponsored IRA that requires contributions from the employer into a retirement account that belongs to the employee. As of publication, the employee can contribute up to $11,500 per year through a subtraction from salary. Employees age 50 or more can contribute an additional $2,500. Employee contributions are fully tax deductible. Employers have a choice between matching the employee’s contributions up to a limit equal to 3 percent of the employee’s salary, or contributing an amount equal to 2 percent of the employee’s salary regardless of what the employee contributes. If an employee participates in more than one salary-subtraction IRA plan, his maximum annual contribution is $17,000 collectively for all plans.
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