IRA Limits

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

Traditional IRA

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.

Roth IRA

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.

Comments

[Nick]

I contributed $5000 to a traditional IRA for tax year 2006. The IRS disallowed the tax deferral in 2008 because, although I made no contributions to my new employer's 401K plan, I was still "covered". I've paid the additional tax due. My question is what do I need to do to withdraw the money without penalty since it's no longer a tax deferred contribution?