Individual Retirement Accounts

The IRA Advantage

Who may contribute to an IRA?

Anyone who has earned income from working and does not reach age 70 1/2 this year may contribute to an IRA on or before his or her tax return deadline, excluding extensions. If you qualify for an IRA contribution, you may contribute up to $5,000 ($6,000 if you are age 50 and over) or 100% of your earned income from working, whichever is less.

Why should I contribute to an IRA?

Many Americans save through IRAs because, like you, they want to enjoy a comfortable retirement. A comfortable retirement begins with sound financial planning, and that's exactly what an IRA represents -- part of a sound financial planning package. IRAs offer you a number of advantages.

• Security - By contributing to an IRA, you are taking an important step toward a secure financial future.
• Tax-Deferred Earnings - All IRA earnings are tax-deferred. This means your IRA earnings are not taxed until you take withdrawals from your IRA.
• Tax Deductions - You may be eligible to deduct all or part of your IRA contribution.
• Flexibility - Each year you decide whether you want to contribute to your IRA. You are never required to make IRA contributions.
• Accessibility - Unlike some retirement plans which only allow distributions at certain times, your IRA funds are always yours. You may withdraw them whenever you wish.*

Are IRA contributions tax deductible?

To find out whether you are eligible for an IRA tax deduction you must first determine if you (and/or your spouse, if applicable) are considered an active participant in an employer's retirement plan. If you (and/or your spouse) are an active participant in a retirement plan at work, your IRA deduction limit depends on your modified adjusted gross income (MAGI).

Find out if you are eligible to deduct your IRA contributions

Are either you or your spouse (or both) considered an active participant in a retirement plan at work?

Married

If you are married and neither you nor your spouse are active participants in a retirement plan at work, your IRA contributions are fully deductible.

If you are married, file a joint tax return, and either you or your spouse (or both) are active participants in a retirement plan at work, your IRA contributions are fully deductible provided your combined MAGI is less than $166,000. If your combined MAGI is at least $166,000 and less than $176,000, you may each qualify for a partial IRA deduction. However, if your combined MAGI is $176,000 or more, you are not eligible for an IRA deduction this year. Even if you are ineligible for a deductible IRA contribution this year, a non-deductible IRA contribution may be advantageous for you.

Single

If you are single and are not an active participant in a retirement plan at work, your IRA contributions are fully deductible.

If you are single and participate in a retirement plan at work, your IRA contributions are fully deductible provided your MAGI is less than $105,000. If your MAGI is at least $105,000, but less than $120,000, you may qualify for a partial IRA deduction this year. However, if your MAGI is $120,000 or more, you are not allowed an IRA deduction this year. Even if you are ineligible for an IRA deduction, consider making a nondeductible IRA contribution.

* Distributions taken prior to age 59 1/2 may be subject to a 10% IRS penalty tax for early distribution. Also, distributions prematurely surrendering a time deposit may be assessed a loss of earnings penalty.
** If you are married but file separate tax returns, special rules will apply for determining your IRA deduction.

Am I considered an active participant?

Generally, you are considered an active participant in an employer's retirement plan if, for the given year, your account balance (in your employer's retirement plan) has received any contributions or has had any forfeitures allocated to it. Employers must indicate if someone is an active participant on the person's Form W-2. Therefore, one easy way to find out if you are considered an active participant is to refer to your W-2 form. If you are still unsure about whether you are considered an active participant, check with your employer.

How do I determine my MAGI?

Simply stated, MAGI is your adjusted gross income (AGI) from your Form 1040 or 1040A determined before any adjustments are made for IRA deductions, foreign earned income exclusions or foreign housing exclusions.

Why should I make IRA contributions if they're not deductible?

Many people still make IRA contributions even if they don't qualify for an IRA deduction. These contributions, referred to as nondeductible IRA contributions, still have many advantages which help individuals save for a financially secure retirement.

One advantage of nondeductible IRA contributions is that the earnings are tax-deferred. In other words, you don't pay taxes on the earnings until you withdraw them from your IRA. Further, by not deducting these contributions on your tax return, you pay taxes on nondeductible IRA contributions in the year the dollars are contributed. Therefore, you do not pay taxes on these amounts when you withdraw them from your IRA.

The need to save for a secure tomorrow, combined with the power of tax- deferred earnings, makes nondeductible IRA contributions a promising alternative for individuals no longer eligible for deductible IRA contributions.

The IRA Advantage

Regardless of whether you make deductible or nondeductible contributions, an IRA gives you the retirement advantage you are looking for. Why delay any longer?

Updated with 2009 limits.

Regulation E Disclosure