Traditional IRA
Annual Contributions
Annual contributions cannot exceed an individual’s annual compensation. Catch-up contributions can be made in addition to the annual contribution by anyone age 50 or older who meets the income requirements.
| Year | Annual contribution | Additional catch-up contribution |
|---|---|---|
| 2009 | $5,000 | $1,000 |
| 2010 | $5,000 | $1,000 |
Note: Annual contribution limits will be adjusted for inflation in $500 increments when the inflation factor for the year or years since the last increase is enough to reach $500.
Contribution Deadline
Contributions for the current tax year must be made by April 15 of the following year, unless April 15 falls on a Saturday or Sunday.
Deductible Contributions
Depending on their tax-filing status, modified adjusted gross income (MAGI) and plan participation, IRA owners may be eligible to deduct their full contribution, part of it or none.
Retirement plan participants| Tax-filing status | Fully deductible | Partially deductible | Nondeductible |
|---|---|---|---|
| 2009 MAGI | |||
| Single | $55,000 or less | $55,001–$64,999 | $65,000 or more |
| Joint (IRA owner is active plan participant) | $89,000 or less | $89,001–$108,999 | $109,000 or more |
| Joint (IRA owner’s spouse, not IRA owner, is active plan participant) | $166,000 or less | $166,001–$175,999 | $176,000 or more |
| 2010 MAGI | |||
| Single | $56,000 or less | $56,001–$65,999 | $66,000 or more |
| Joint (IRA owner is active plan participant) | $89,000 or less | $89,001–$108,999 | $109,000 or more |
| Joint (IRA owner’s spouse, not IRA owner, is active plan participant) | $167,000 or less | $167,001–$176,999 | $177,000 or more |
Non-participants in a retirement plan
IRA investors who are not covered by a retirement plan at work and are single or who have a spouse without a retirement plan at work can contribute up to $5,000 for 2009 and 2010 (compensation must equal or exceed the contribution) and can deduct the full contribution amount. There is no maximum modified MAGI limitation.
Nonrefundable tax credits
Eligible taxpayers can claim a nonrefundable tax credit for contributions to their IRAs. The maximum credit allowed is 50% (maximum $2,000 in 2009 and 2010) of total annual contributions. Eligible taxpayers include:
- joint filers with a MAGI of $55,500 or less in 2009 and 2010
- heads of household with a MAGI of $41,625 in 2009 and 2010
- single filers with a MAGI of $27,750 or less in 2009 and 2010
Unemployed Spouses
- An unemployed spouse or a spouse not covered by a retirement plan at work can make tax-deductible contributions to an IRA providing:
- the other spouse belongs to a retirement plan at work
- the couple’s MAGI is less than $166,000 in 2009 and $167,000 in 2010
- If the couple files a joint tax return with compensation equal to or exceeding the IRA contributions for that year, the spouse may contribute up to $5,000 ($6,000 for spouses who are age 50 or older) in the 2009 and 2010 tax years
Penalty-free early withdrawals
Traditional IRA owners can withdraw money penalty-free before age 59-1/2 for the following reasons:
- a first-home purchase, up to $10,000
- qualified higher education expenses for themselves, spouse, child or grandchild
- certain periodic payments, medical expenses and health insurance premiums
- if assessed with a levy by the IRS
- upon disability or at death
Withdrawals are taxed as ordinary income.
Creditor protection
- Contributory IRA assets are protected from creditors up to $1 million. Contributory assets above $1 million are subject to state law regarding creditor protection.
- Rollover IRA assets that came from employer-sponsored retirement plans [401(k), 403(b), 457, profit-sharing, money purchase, SIMPLE and SEP IRAs] enjoy unlimited protection regardless of the amount and are not subject to state law regarding creditor protection.
Converting to a Roth IRA
- Assets in a traditional IRA may be converted to a Roth IRA if an investor’s MAGI for that year is $100,000 or less (married or single).
- Required minimum distributions (RMDs) from the traditional IRA are not considered part of the MAGI. Investors 70-1/2and older who are subject to RMDs from their traditional IRA may be able to convert to a Roth and avoid future distributions. Keep in mind that RMDs taken from the traditional IRA in the year of conversion are not eligible to be converted. Additionally, all conversion amounts are subject to taxation in the year of conversion.
- A married person filing a separate return cannot convert a traditional IRA to a Roth IRA.
- The taxable portion of the converted amount will be treated as taxable income.
- Future contributions can be made to the new Roth IRA.
- A conversion must be initiated by December 31 of a given year to be considered a conversion for that taxable period.
Note: Income limit for conversion has been waived for 2010. Call us if you would like us to help you determine if this is a viable option for you.