Can You Contribute to an IRA With Pre-Tax Dollars?
The traditional and Roth individual retirement accounts (IRAs) offer conservative savers as well as speculative investors a tax-preferred vehicle in which to deposit savings for retirement. While tax rules have never been known for their simplicity or ease of understanding, IRA rules are reasonably comprehensible. The IRA rules limit how much you can contribute to an IRA and the maximum income you can make before you are prohibited from contributing. In order to avoid penalties, it is important to abide by these limits.
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Types of IRA
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The Internal Revenue Service (IRS), acting on behalf of U.S. Congressional legislation, allows two types of IRAs. The traditional IRA is a tax-advantaged account that allows pre-tax income to be deposited and then taxed upon withdrawal. A Roth IRA allows post-tax earned income to be deposited to the account and then withdrawn tax-free.
Pre-Tax Income IRA Contributions
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While there is no minimum income limit for either the Roth or the traditional IRA, it is post-tax earned income that one deposits to a Roth account. By contrast, pre-tax income is contributed to a traditional IRA. Whatever amount you deposit into a traditional IRA, up to the annual contribution limit, is deductible from your income taxes.
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AGI and the Phased-Out Contribution
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Two concepts that are important in the calculation to determine traditional IRA eligibility are adjusted gross income (AGI) and the phased-out IRA contribution. A phased out contribution means it is prorated between income limits. Closer to the lower limit, an IRA saver can contribute a larger proportion, but as this person earns more (closer to the upper limit), they can contribute less. Above the income limit, a person is no longer permitted to contribute to an IRA. AGI is calculated as total gross income less total IRS-qualified deductions.
Contribution Limits
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For 2009 and 2010, the maximum annual contribution for both the Roth and traditional IRA is $5000 for everyone under 50 years old and $6000 for all contributors who are 50 and older. For tax year 2011 and all years going forward, the maximum IRA contribution will be adjusted based on the rate of inflation during the previous year. Due to negligible inflation in 2010, the IRS has announced that most retirement account limits, including contribution limits, would remain unchanged for 2011, with some exceptions.
Traditional IRA Income 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 $66,000 (AGI) in 2011, up from $65,000 in 2009 and 2010. If this person makes more than $56,000 and less than $66,000 AGI, their deduction is phased out as they approach $66,000, also for 2011. This income range was raised from $55,000 and $65,000 for 2009 and 2010. At $56,000 and under, the individual can contribute and deduct the full IRA contribution, up from $55,000. A married couple who files jointly and who has a qualified retirement plan at work cannot contribute if they make more than $110,000 AGI in 2011. They can make a full contribution and deduction if they make $90,000 AGI or less. This couple's deduction is phased out between $90,000 and $110,000 AGI. The phase out range was raised from the 2009 and 2010 limits of $89,000 and $109,000.
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