During retirement, many investors look for ways to decrease their taxable income and shelter money from taxes. Because Traditional IRAs are not subject to tax until money is withdrawn and Roth IRAs allow for money to be removed tax free, both are attractive shelters for investments that are distributing unspent and taxable dividends. Retirees have to carefully follow IRS rules to make sure they’re eligible to contribute to an IRA.
People may contribute only up to a certain maximum each year. Persons over age 50 are also allowed to make “catch up” contributions. This amount changes nearly annually, so check the IRS Web site for the current year’s maximum. In 2010, individuals are allowed to contribute $5,000 to a Traditional or Roth IRA and an additional $1,000 if over age 50, unless they met very specific exceptions for bankrupt companies with 401(k)s or military service.
People must have taxable employment compensation equal to their contribution amount. This does not include income from investments, property, annuities or pensions, or deferred compensation. People who have fully retired and have no taxable compensation cannot contribute to an IRA, unless they have a spouse who earned enough taxable compensation to either make a contribution for both spouses or to an individual IRA for either partner.
Spouses without income whose spouse earns enough to contribute for both or to either partner’s IRA may make a contribution. If a working spouse cannot deduct an IRA because of Social Security income or because he or she is eligible for a qualified workplace retirement plan such as a 401(k), the nonworking spouse may still be able to deduct an IRA as long as the working spouse’s income doesn’t fall beyond maximum limits. These amounts are adjusted for inflation, so check the IRS Web site for current year’s maximum income limit. In 2010, married couples filing jointly must have income below $166,000 to qualify for a full deduction.
Deducting your IRA depends on compensation, taxable Social Security, and eligibility for workplace retirement plans, such as a 401(k). Each year, the IRS places a cap on the amount of compensation you may earn and still deduct a Traditional IRA. Check the IRS Web site for current numbers. The IRS provides a worksheet to determine how much you may deduct if you receive Social Security.
People may contribute to a Roth IRA at any age. To make a Traditional IRA contribution, you must be under age 70 ½. You’ll begin required minimum distributions at this age in a Traditional IRA.