Not every taxpayer is eligible for a qualified individual retirement account, whose contributions can be deducted from income before taxes are paid. High-income taxpayers, or those covered by retirement plans at work, may be barred from traditional IRAs or have their deductible contributions limited. They still may get some benefits, however, from a non-qualified IRA or non-qualified contributions to their regular IRA.
IRA Income Caps
The Internal Revenue Service caps tax-deductible contributions to a traditional IRA for a couple filing jointly at $183,000 in 2012 or $188,000 for 2013 if the spouse who makes the contribution isn't covered by a workplace retirement plan. The limit drops to $112,000 in 2012 or $115,000 in 2013 if the contributing spouse is covered by workplace retirement.
A couple barred from tax-deductible IRA contributions can still contribute to an IRA and enjoy tax-free growth from earnings until money is withdrawn. That can amount to a sizable savings over a long period, even after taxes are paid when earnings are taken out, typically after age 59 1/2. You also can withdraw those taxed contributions at any time, without either income taxes or a 10 percent early withdrawal penalty.
Non-deductible contributions to a traditional IRA are subject to the same maximum limits as deductible contributions -- $5,000 for 2012 and $5,500 in 2013. Taxpayers over age 50 are allowed another $1,000 in "catch-up" contributions in both years. Those limits double for spousal IRAs, separate accounts for both spouses even if only one spouse contributes.
A taxpayer can make non-qualified contributions to a traditional IRA if income falls into a "phase-out" range in which deductible contributions are reduced gradually as income goes up. For a spouse covered by retirement at work that range is $92,000 to $112,000 in 2012 or $95,000 to $115,000 in 2013. If the contributing spouse doesn't have work retirement, the range is $173,000 to $178,000 in 2012 or $178,000 to $188,000 in 2013.
If the phase-out caps a qualified IRA contribution at $3,000 in 2012, for instance, a taxpayer can take a tax deduction for that amount, then put in another $2,000 in a non-qualified or non-deductible contribution. All non-deductible contributions, however, must be reported to the IRS on a Form 8606.
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