About IRA Contributions
Investors must pay close attention to IRA contributions. The Internal Revenue Service limits the amount investors can contribute to an Individual Retirement Account each tax year. To make matters more complicated, this amount changes from year to year and people of different ages can contribute different amounts. There are also different rules depending on whether the investor is contributing to a Roth IRA or a Traditional IRA.
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Types
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It is important to understand the different types of Individual Retirement Accounts when figuring out IRA contributions. Anyone with earned income can open and contribute to a Traditional IRA. Contributions are tax deductible up to certain income limits. You can still contribute to a Traditional IRA if you exceed the income limits but it wont be tax deductible. You must meet strict income limits to open or contribute to a Roth IRA. Roth IRA contributions are not tax deductible but they are more flexible than Traditional IRA contributions. Traditional IRAs forbid contributions after an investor reaches 70 1/2 years. Roth IRAs allow it.
Function
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There are limits on the amount you can contribute to a Traditional IRA and a Roth IRA in a tax year. Prior to 2002 the limit for investors under 50 years old was $2000. The IRS raised that to $3000 in 2002 then $4000 in 2005 then $5000 in 2008. The Internal Revenue Service is expected to continue raising IRA contribution limits in the future. It is wise to check with the IRS before making any IRA contributions.
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Considerations
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The Internal Revenue Service allows older investors to contribute more to IRAs in order to "catch up." They do this since older investors are presumably closer to retirement age. As with IRA contributions for younger investors, the IRS changes contribution limits for older investors from year to year. Before 2002 the limit was the same as younger people at $2000. The IRS raised it to $3500 in 2002 then $4500 in 2005, $5000 in 2006 and $6000 in 2008. The Internal Revenue Service is expected to continue raising IRA contribution limits in the future. Be sure to check with the IRS before making any IRA contributions.
Benefits
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The primary benefit of contributing to a Traditional IRA is the tax deduction you get for the contribution in the tax year you are making it. You get this as long as you make less than the income limit that year. Traditional IRAs grow tax-deferred. You must pay taxes on your Traditional IRA gains when you take distributions in retirement. It is assumed that you will be in a lower tax bracket when you retire so you will end up paying fewer taxes. Roth IRA contributions are not tax deductible but the account grows tax free. In retirement the distributions are also tax free.
Time Frame
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IRA contributions are assigned to a specific tax year. However, the deadline to contribute to a specific tax year extends beyond the actual end of that year. The deadline is actually the tax filing deadline. That means you can make IRA contributions for a tax year up to April 15 of the next year. This gives an investor 16 1/2 months to contribute in a given tax year.
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