Traditional IRA Tax Credit
Traditional individual retirement accounts (IRAs) allow you to make tax-free contributions to an investment account. Better yet, the money you leave in a traditional IRA is left to grow and compound, untouched by the IRS. When you make a qualified withdrawal, or distribution, from a traditional IRA, the money is taxed at your income tax rate. In order to take a tax write-off for a traditional IRA contribution, the IRS has certain stipulations.
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Deduction Limits
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You can own multiple IRA accounts; but as of 2010, your total contributions to any or all of those accounts cannot exceed $5,000. Those over 50 are allowed to contribute up to $6,000. If you are married, filing jointly and qualify for a traditional IRA, you and your spouse are each allowed to contribute $5,000 to your respective accounts, for a total of $10,000. If one of you is over 50 you can contribute up to $11,000, and if both of you are over 50 you can contribute up to $6,000. After 2010, IRA contribution limits will increase with inflation.
Income Limits
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Each year, the IRS decides who qualifies to take a write-off for a traditional IRA contribution, and who is too rich. In 2010, couples who are married, filing jointly can have an adjusted gross income (AGI) of up to $89,000. Those with an AGI between $89,001 and $109,000 are phased out of the traditional IRA tax credit, meaning they can only contribute a percentage of the contribution limit. Those who are single or heads of house can have an AGI of up to $56,000; those who make between $56,001 and $66,000 are phased out.
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Contribution Deadline
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To qualify to take the traditional IRA tax credit in any given year, you must make a traditional IRA contribution by April 15 of the following year. In other words, you have until the filing deadline to catch up on putting aside retirement funds. Just make sure your IRA custodian knows what year you are contributing to--write it on your check, or indicate it on any forms you hand in with your contribution. If you file your return early, you can still qualify for tax savings if you contribute by April 15th--you just need to hand in an amended return.
Contribution Cut-Off
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You can keep making tax-free, traditional IRA contributions until the year you turn 70 1/2. At that point, not only can you not make contributions, you must start taking required minimal distributions from your account or be slapped with a hefty tax penalty.
Contribution Sources
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The IRS lets you contribute to a traditional IRA and take a tax write-off as long as the money is earned income or compensation, non-taxable combat pay, military differential pay or alimony. There is an exception for those who are married and filing jointly--if one spouse made under the contribution limit, he can still contribute the full amount as long as the couple's joint income is large enough to cover both spouses' contributions.
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References
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