Here are the basics:
An IRA or Individual Retirement Account is a personal savings plan that allows an individual with earned income to accumulate money tax deferred until retirement.
You can still open an IRA for your 2006 contribution as long as it account is opened and funded before April 15, 2007.
Contributions to an IRA may or may not be tax deductible depending on whether you and/or your spouse are participating in a company retirement plan and your level income.
For 2006 and 2007, the maximum contribution to an IRA is $4,000. If you are age 50 or older you can contribute an additional $1,000 called the catch-up contribution.
You cannot set up an IRA unless you and/or your spouse have earned income that tax year of at least the amount you would like to contribute. If you have income only from investments and social security, you cannot put money away in an IRA. It has to be compensation. Employment or self employment income (or alimony) is necessary to make a contribution.
As long as you have earned income you can setup an IRA, you just may not be able to deduct it from your taxes. If you and your spouse do not participate in a company retirement plan, you can both contribute the maximum to IRAs and deduct them from your taxes. Everyone else, brace yourselves it gets more complicated.
If you are a participant in a company sponsored retirement plan (like a 401k, 403b, SEP, traditional pension) then you and your spouse can deduct your IRA contribution as long as you earn less than the income limitations set each tax year by the IRS.
So if you are the active participant in a company plan, you can deduct IRA contribution for yourself in 2006 if you earn less than $75,000 (with contribution reduced up to $85,000) and are married filing jointly. In 2007, income must be less than $83,000 (with contribution reduced up to $103,000). The filing single or head of household limits are lower for active participants. In 2006, you must earn less than $50,000 (with contribution reduced through $60,000) to deduct your IRA. In 2007, the limit increases to $52,000 (with reduced contribution through $62,000).
If you are not covered by a company retirement but your spouse is, you must earn less than $150,000 in 2006 (reduced contribution up to $160,000) in order to deduct your IRA contribution. In 2007 the phase out limit is $156,000 to $166,000.
Even if you do not meet these limits, it may be worth while making a nondeductible IRA contribution. Just make sure you file IRS Form 8606.
More to come next week on Roth IRAs and conversion strategies.
Libby Mihalka
The Financial Pragmatist
No comments:
Post a Comment