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An individual retirement arrangement, or IRA, is a personal savings plan that allows you to set aside money for retirement while offering you tax advantages. There are four basic types of IRAs:
- Traditional IRAs, which usually offer a tax deduction for the tax year in which you contribute, plus the opportunity for your earnings to grow tax free until you withdraw them;
- Roth IRAs, which offer no immediate tax deduction but generally allow you to withdraw the money you have accumulated in the account tax-deferred during retirement;
- SEP-IRAs for self-employed workers; and
- SIMPLE IRAs, which are established by very small companies for their workers.
In order to contribute to your own traditional or Roth IRA, you must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self employment. Taxable alimony and separate maintenance payments also will count as compensation. Note, however, that if you (or your spouse) are covered by a retirement plan at work, your ability to deduct your contributions to a traditional IRA may be limited, depending on your compensation level.
Visit the IRS site to see how much can contribute to your IRA. If you qualify, the maximum contribution is 100% of your compensation up to $4,000 for 2006 and 2007 if you have not yet reached age 50, and $5,000 if you have reached age 50.
With a Roth IRA, the maximum contribution amounts are the same. However, there is only one combined limit for Roth and traditional IRAs. For example, in 2006, the maximum IRA contribution is $4,000 for those under age 50. If you are eligible, you can contribute up to $4,000 in a traditional IRA or in a Roth IRA or divide up the $4,000 between the two accounts, just as long as the total does not exceed $4,000.
How do I set up an IRA?
It's easy. Most investment companies, banks and insurance companies will be happy to help you set up an IRA. Some will waive the minimum account requirement if you agree to have a fixed amount transferred from your bank account each month to the IRA. You then will have your choice of investment options, depending on the financial institution, including stocks, mutual funds, certificates of deposit and other investments. A Web search for "start an IRA" will lead you to information about companies that can offer you an IRA. The deadline for making a contribution to a traditional or Roth IRA for the year is the due date of your return, not including any extensions of time to file.
What about an IRA for my spouse?
IRAs cannot be owned jointly by you and your spouse. But if there are any amounts remaining in your IRA when you die, they will be paid to the beneficiaries you designate.
If both you and your spouse work, have taxable compensation and you file a joint income tax return, each of you can contribute to a separate traditional or Roth IRA (if you qualify), up to the limits set by the IRS. Even if one spouse does not work, you may be able to make a contribution to a separate IRA for your nonworking spouse as long as you file a joint return. Note that you cannot contribute to a traditional IRA beginning in the year in which you attain age 70½; however, there is no age limit for contributing to a Roth IRA.
Should I convert my IRA to a Roth IRA?
If you already have a traditional IRA, you may consider converting your existing traditional IRA into a Roth IRA. If you qualify to make the conversion, you would pay income tax in the year of the conversion on the value of the amount you convert, but, after five years (and meeting certain other requirements), you can qualify to receive tax free distributions of the original amount and any earnings from your account at retirement.
Tip: As part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), Congress has created a special opportunity for converting a traditional IRA to a Roth IRA in 2010. Anyone, regardless of income, may convert a traditional IRA to a Roth IRA in 2010 and choose to either include the entire conversion in their income in 2010, or include the income from the conversion over the next two years, 2011 and 2012. You may want to discuss this option with your tax advisor now to determine how it can benefit your retirement planning.
Keep in mind that you must take distributions from a traditional IRA beginning in the year you attain age 70½. There is no such requirement with regard to the Roth IRA.
Calculators
Is my IRA contribution deductible?
IRA Deduction Limits for 2006 and 2007 (if you are covered by a retirement plan at work)
If you are covered by a retirement plan at work, use this table to determine whether your modified Adjusted Gross Income (AGI) affects the amount of your deduction. Even if you cannot take the deduction, you still are able to make the contribution. |
| IF your filing status is ... |
AND your modified adjusted gross income (modified AGI)1 is ... |
THEN you can take ... |
| single or head of household |
$50,000 ($52,000 in 2007) or less |
a full deduction. |
| more than $50,000 ($52,000 in 2007)
but less than $60,000 ($62,000 in 2007) |
a partial deduction. |
| $60,000 ($62,000 in 2007) or more |
no deduction. |
|
married filing jointly or
qualifying widow(er) |
$75,000 ($83,000 in 2007) or less |
a full deduction. |
| more than $75,000 ($83,000 in 2007)
but less than $85,000
($103,000 in 2007) |
a partial deduction. |
| $85,000 ($103,000 in 2007) or more |
no deduction. |
| married filing separately 2 |
less than $10,000 |
a partial deduction. |
| $10,000 or more |
no deduction. |
Roth IRAs are made with after-tax money and are not deductible. This table shows how much you can contribute to a Roth IRA based on 2006 limits.
| Roth IRA Contribution Limits for 2006 and 2007 |
| IF you have taxable compensation and your filing status is ... |
AND your modified AGI is ... |
THEN |
| married filing jointly or qualifying widow(er) |
less than $150,000 ($156,000 in 2007) |
you can contribute up to $4,000 ($5,000 if you are age 50 or older). |
| at least $150,000 ($156,000 in 2007)
but less than $160,000 ($166,000 in 2007) |
the amount you can contribute is reduced, as explained in contribution limit reduced. |
| $160,000 ($166,000 in 2007) or more |
you cannot contribute to a Roth IRA. |
| married filing separately and you lived with your spouse at any time during the year |
zero (-0-) |
you can contribute up to $4,000 ($5,000 if you are age 50 or older) as explained under how much can be contributed. |
more than zero (-0-)
but less than $10,000 |
the amount you can contribute is reduced, as explained in contribution limit reduced. |
| $10,000 or more |
you cannot contribute to a Roth IRA. |
| single,
head of household
or married filing separately and
you did not live with your spouse
at any time during the year |
less than $95,000 ($99,000 in 2007) |
you can contribute up to $4,000 ($5,000 if you are age 50 or older) as explained in how much can be contributed. |
| at least $95,000 ($99,000)
but less than $110,000 ($114,000 in 2007) |
the amount you can contribute is reduced, as explained in contribution limit reduced. |
| $110,000 ($114,000 in 2007)or more |
you cannot contribute to a Roth IRA. |
To do:
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Identify an IRA plan that fits your needs and can start contributing today!
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