Q: Tax Playa, how much can I put in an IRA in 2007?
Scott, Arlington VA
A: The lesser of $5000 or earned income can be contributed to all types of IRAs for 2008 ($10000 in the case of a married filing jointly household). Additionally, $1000 ($2000 in the case of a married filing jointly household) in "catch-up" contributions can be made.
A person can contribute either to a Traditional IRA or a Roth IRA, or both (but not to exceed the limits above).
If a premature withdrawal is made from an IRA (prior to age 59 and 1/2), a 10% penalty on amounts in excess of basis (basis meaning non-deductible Traditional IRA contributions, Roth IRA contributions, and Roth conversions more than five years old) is generally due. Exceptions to this include:
- $10,000 for a downpayment on a first home
- payment for higher education expenses
- payment for medical insurance or medical expenses in excess of 7.5% of AGI
- death or diability of the IRA owner
In a Traditional IRA, the money contributed is deducted from income, and is fully taxable at retirement (after attaining age 59 and 1/2). The ability to deduct a Traditional IRA contribution is limited based on income and whether you or your spouse is covered by a workplace retirement plan. See the left hand side of the page for the income limits.
If the deduction is not allowed (or is only partially allowed), a "non-deductible" IRA contribution has been made. This non-deductible contribution counts as basis when IRA distributions are made in retirement.
In a Roth IRA, just the opposite is done. Money that goes in is after-tax, but grows tax-free for retirement.
There are not any workplace retirement plan restrictions on Roth IRAs, but there are inflation-adjusted income limits (based on AGI) for contributions. The following are the 2007 limits:
Married Filing Separately: $10,000 AGI
Single/Head of Household: phases out between $101,000-$116,000
Married Filing Jointly/Qualifying Widow(er): phases out between $159,000-$169,000
Additionally, some taxpayers may qualify to "convert" part or all of a Traditional IRA into a Roth IRA. This is limited to taxpayers with AGI of less than $100,000 (not counting the conversion amount or required minimum distributions from a Traditional IRA). Everything besides basis in a Traditional IRA is added to income and taxes are paid the year of the conversion.
Much more on this can be found in IRS Publication 590, Individual Retirement Accounts.