Maximum Income for a Traditional IRA
An Individual Retirement Account, or IRA, offers savers a powerful tax-advantaged tool to invest money for retirement. Understanding the rules that govern contributions to an IRA is vital to properly utilize this beneficial type of account. There are limits to how much you can contribute to an IRA, and a maximum income defining who can contribute. In order to avoid penalties, you must understand these limits.
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IRS Rules
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An IRA is a tax shelter that is approved by the Internal Revenue Service, and it is their rules that govern who can contribute to a traditional IRA and how much. A traditional IRA allows a saver to deposit money tax-free and pay taxes only when retirement income is withdrawn. Because the IRS has determined the rules that govern who can contribute, understanding the rules can be very difficult. There several factors that determine which category of limits are applicable.
Contribution Limits
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In 2009 and 2010, for all contributors, the maximum annual contribution is $5,000 for everyone under 50 years old, and $6,000 for all contributors who are 50 and older. For 2011 and beyond, the maximum contribution and income limits will be adjusted based on the rate of inflation during the previous year. The official IRS inflation rate has not yet been determined; therefore, the annual contribution and maximum income limits have not been calculated for 2011.
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Married Filing Separately
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If a single, head-of-household taxpayer, or at least one spouse of a married couple filing jointly does not work for a company that has a qualified retirement plan, there is no income limit to contribute to a traditional IRA. A married couple that files separately for tax purposes faces some penalties for filing separately; limiting contribution to an IRA is one of those penalties. The income limit for a married person who files separately from her spouse is below $10,000 whether or not she has a qualified retirement plan at work.
AGI and Phased-out Deductions
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Two concepts that help illuminate the calculation to determine IRA eligibility are Adjusted Gross Income, known as AGI, and the phased-out IRA contribution. A phased-out contribution and deduction means it is prorated between the income limits. Closer to the lower limit, a contributor can deduct a larger proportion, as this person earns more; closer to the upper limit, they can contribute and deduct less. AGI is calculated as total gross income less total IRS qualified deductions.
Individual Limits
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Individuals who file a single or head-of-household tax return and have a qualified retirement plan at work cannot contribute to a traditional IRA if they make more than $65,000 AGI in 2009 or 2010. If this person makes more than $55,000 and less $65,000 or less AGI, their deduction is phased out as they approach $65,000. At $55,000 and under, the individual can contribute and deduct the full IRA contribution.
Married Couple's Limits
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A married couple who files jointly and who has a qualified retirement plan at work cannot contribute if they make more than $109,000 AGI in 2009 and 2010. They can make a full contribution and deduction if they make $89,000 AGI or less. This couple's deduction is phased out between $89,000 and $109,000 AGI.
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