Even if you’re not allowed to take a tax deduction for making contributions to an individual retirement account, you might be eligible to open one of these accounts. IRAs have advantages even if you can’t deduct the contributions you make. The restrictions for opening these accounts depend upon whether you start a traditional IRA or a Roth IRA as well as whether you are married.
To open a traditional IRA and make contributions you must not attain age 70½ by the end of the year. If you’re older than that, you’re not allowed to open a traditional IRA, because you’re prohibited from making deposits to it. This age limit applies even if you’re still working and not retired. The age restriction is valid regardless of whether you‘re allowed to make contributions to an employer retirement plan.You don’t face an age restriction for opening a Roth IRA.
You must have taxable compensation to open either a traditional IRA or a Roth IRA. In fact, the amount of IRA contribution you’re allowed is limited to your taxable compensation up to a maximum of $5,000 per year ($6,000 if you’re age 50 or older) for 2012. Taxable compensation is the amount you earn from working. This comprises wages, salaries and self-employment income. Don’t subtract a self-employment loss from wages or salaries when calculating your total compensation. Income from investments or rental activity is not taxable compensation.
You can still open an IRA if you are a nonworking spouse without taxable compensation by filing a joint tax return. In effect, your IRA contribution considers the combined compensation of both you and your spouse. Your spouse can still open an IRA and make a contribution. After your spouse’s IRA contribution, enough taxable compensation must remain for a contribution to the IRA you open. As a result, both of you can open IRAs and make the maximum contribution as long as one of you has 2012 earnings of $10,000 ($11,000 if only one of you is age 50 or older or $12,000 if both of you are age 50 or older).
You have another limitation for opening a Roth IRA because making a contribution is restricted by your annual amount of modified adjusted gross income (MAGI). This figure for most people is the same as the adjusted gross income line on a tax return. The 2012 MAGI limit for a married couple filing jointly or a qualifying widow (or widower) is $183,000. For people filing single or head of household the MAGI limit for a Roth IRA is $125,000. If you are married filing separately and did not live with your spouse during year, you cannot open a Roth IRA and make a contribution if your income is $10,000 or more.