Each year the Internal Revenue Service permits taxpayers to contribute to Individual Retirement Accounts. Generally, individuals pay into either a traditional or a Roth IRA, or both. The total maximum contributions for traditional and Roth IRAs are aggregate. This means that the taxpayer adds the contributions to each account together, the sum of which cannot exceed $5,000 in 2010 or 2011. Those over age 50 can make additional contributions of $1000 per year.There are several circumstances, however, that could limit the maximum contribution.
In order for a taxpayer to be eligible to contribute to an IRA during the year, traditional or Roth, he must have earned income for that year. Traditional IRA contributions are made with pre-tax dollars, investments grow tax-deferred within the account and withdrawals are treated as regular income for federal tax purposes. You receive no deduction for contributions to Roth IRAs, however, you also do not pay tax on investment earnings, and when you take a qualified withdrawal from your Roth account, it is tax-free.
For 2010 and 2011, limits apply to your maximum contribution only if your Adjusted Gross Income is less than the full contribution amount, or if you or you spouse were covered under a retirement plan at work. As of 2011, if you were covered by an employer plan, and you file as single head of household, your traditional IRA deduction will begin to phase out at an AGI of $56,000, dropping to zero for AGIs over $66,000. For married filing jointly the phase out is between $90,000 and $110,000, and for married filing separately, you cannot contribute if your AGI exceeds $10,000 (there is not phase-out). If your spouse is covered by a plan at work, but you are not, the phase out is between $167,000 and $177,000 AGI.
The same contribution limits apply for a Roth IRA. However, since Roth IRA contributions are after-tax, the IRS restricts who can contribute to a Roth IRA based on AGI. As of 2011, for single, head of household, the limit is $122,000; for married filing jointly and qualifying widower, the limit is $179,000 and for married filing separately, the limit is $10,000. There are no age restrictions on Roth IRA contributions.
Phase-Out Rules for a Roth
There are phase out ranges within the income limits for contributions. Up to the lower limit, the full $5,000 is allowable but the amount phases out as the taxpayer's modified AGI increases. As of 2011, for married filing jointly and qualifying widower, the phase out range is from $169,000 to $179,000 and for single and head of household, the range is from $107,000 to $122,000. For married filing separately, there is not phase out; you cannot contribute to a Roth IRA if your AGI is $10,000 or more.
The IRS requires the taxpayer to withdraw any excess contributions. If the excess is not withdrawn prior to the taxpayer's filing date, he is subject to a six percent excise penalty tax. Any income that the person earns on the excess contribution is subject to capital gains taxes as well.
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