Who Can Do an IRA?
Putting money into an individual retirement arrangement is an excellent way to save for the future, but not everyone can contribute to such a plan. The IRS places limits on the type of income you can contribute to an IRA, as well as income guidelines that limit eligibility for IRA contributions and deductions.
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Earned Income
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In order to contribute to a traditional or Roth IRA, you must have earned income equal to or greater than the amount you put in the IRA. For instance, if you wish to make the full $5,000 or $6,000 contribution for 2011, your earned income must be at least that much. You cannot contribute unearned income, such as interest, dividends or capital gains, to your IRA accounts.
Income Limits
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The IRS imposes income limits on the availability of traditional and Roth IRA accounts. The income limits for traditional deductible IRA accounts is lower than those for the Roth IRA, and it is important to check the current income guidelines before you make your annual IRA contributions. If your income is close to the current limit, it is a good idea to verify the rules before you make your annual contribution. If you contribute to an IRA even though your income makes you ineligible, you could be subject to tax penalties until you remove that money.
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Contribution Limits
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If you are eligible to make an IRA contribution, you need to stay within the annual contribution limits set by the IRS. For 2011, you can contribute up to $5,000 to your IRA, plus an extra $1,000 if you are 50 years of age or older. The IRS reviews these contribution limits on an annual basis, so it is always a good idea to check the tax agency's website for current rules before making your annual IRA contribution.
Self-Employed
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If you are self-employed and do not have any traditional wages, you cannot contribute to a traditional or a Roth IRA. You can, however, contribute to a SEP-IRA. The SEP-IRA is designed to help self-employed individuals and business owners save for retirement while reducing their taxable income and tax liability. The amount you can put into a SEP-IRA is dependent upon your self-employment income, but for 2011, the most you can contribute is $49,000.
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References
- Photo Credit A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com
