IRA or Individual Retirement Account is a kind of retirement plan that helps employees save for their retirement and receive tax benefits through the account. There are a number of IRAs that you can choose from. Irrespective of which one you choose, there are limits which the government has laid down which have to be followed. These limits change every year and if not adhered to there are heavy penalties which are levied. The two types of limits that have been categorized are contribution limit, income limit and deduction limit.
The contribution limit determines the maximum amount which you can contribute toward your retirement. For the purpose of IRA investors, qualifying income will be taken into consideration. This will include income generated from self employment, salary, alimony and nontaxable combat pay.
Types of Contribution Limits
In Traditional IRA, the investor can get a reduction on tax on the amount that gets saved in the account. This means that the amount you save in the account is kept aside and there will be no tax levied on it which in turn reduces your annual taxable income. Once you withdraw the amount upon retirement, the accumulated savings will be taxed like ordinary income. You have to start withdrawing the amount invariably once you reach the age of 70.5 years. If you withdraw it before you reach 59.5 years, there is an additional 10 percent tax that is levied on early withdrawal.
Unlike Traditional IRA, Roth IRA gives you the option of possible tax free distribution and saving. In Roth IRA, there is no tax deduction on the final withdrawal amount. This means that taxable income gets saved in the account but withdrawals from the Roth IRA are tax free. Even if you are already covered in another retirement plan from your work, you are still eligible for Roth IRA.
What Is The Contribution Limit?
You can make a contribution to your IRA during anytime of the year. You can also make a contribution toward the previous years’ IRA. There is only one condition and that is the payment has to be made before the preset deadline. In the case of 2011, the IRA contributions can be made between January 1, 2011 and April 15, 2012.
The limit that has been set for investors who are less than 50 years of age is $5,000. In case you are over and above 50 years of age, your contribution limit is extended to include an extra $1,000. Therefore, by the end of the year you can contribute a total of $6,000. This limit applies to all kinds of IRAs. You can invest in multiple accounts but the total amount cannot exceed the annual amount, preset depending on your age.
Roth IRA income limits are such that only a few people are generally eligible to contribute towards it. The eligibility for Roth IRA will depend upon your work place retirement, marital status and income. While contributing towards Roth IRA, your modified adjusted gross income (MAGI) is also taken into consideration. The different kinds of contribution limit for investors belonging to different classes can be summarized as follows:
Limit for Married Couples
- For 2011 the modified adjusted gross income has to be less than $169,000 for married couples who file for Roth IRA together.
- In case the joint MAGI lie between $169,000 and $ 179,000, they can contribute an amount which is less than their full limit.
- In case if the MAGI is more than $179,000, applicants are not eligible for Roth IRA.
Limit for Singles
- For the year 2011 the contribution limit for singles is $107,000 going up to a maximum of $ 122,000.
Conversion Income Limitation
Tax payers have the option to convert a traditional IRA to a Roth IRA. Even if you have a Modified Adjusted Gross Income (MAGI) of $100,000 or more, you can covert the regular IRA to Roth IRA which is eligible for a tax free withdrawal. This option has become common place since 1st January 2010. In the past such a conversion was only possible if your (MAGI) was less than $100,000.
Deduction limit is the extent of deduction in the amount that the investor intends to contribute toward an IRA. The ability to deduct the contribution amount will vary depending on the constantly changing annual limit. Your Modified Adjusted Gross Income (MAGI) will also play a part in determining your limit of deduction. This further gets altered depending on your marital status and whether you are covered under a retirement plan at work or not. The following are the deduction limits available to investors.
The following deduction limit is for the investors who are covered under a retirement plan in their work place.
For singles or heads of household members
- When your MAGI is less than $56,000, the deduction limit is the full amount till your contribution limit.
- When your MAGI is between $56,000 and $66,000, there is partial deductibility.
- When your MAGI is more than $66,000, there is no deductibility.
For married people filing together or as a widow/widower
- If your MAGI is less than $90,000, there is full deduction available up to your contribution limit.
- If your MAGI is between $90,000 and $110,000, there is partial deductibility.
- If your MAGI is more than $111,000, there is no deductibility.
For ones who are married but filing separately
- If your MAGI is less than $10,000, there is partial deductibility
- If your MAGI is more than $10,000, there is no deductibility
The following deduction limits are for those investors who are not covered under any retirement plan
For those who are filing as single, head of household or qualified widow/widower:
- Full deduction up to contribution limit for MAGI of any amount is offered.
For those filing as married couple or separately where the spouse is also not covered by any plan:
- Full deduction up to contribution limit for MAGI of any amount is given.
For those who are filing as a married couple but spouse is covered under a plan:
- If your MAGI is less than $169,000 then there is a full deduction possible up to the limit of your contribution.
- If your MAGI is between $169,000 and $179,000 then there is a partial deduction that is available.
- If your MAGI is $179,000 then there is no deduction that is available.
For married investors filing separately with spouse who is covered
- If your MAGI is less than $10,000 then a partial deduction that can be availed.
- If your MAGI is more than $10,000 then there is no deduction offered.
Before determining whether you are eligible for creating an IRA account, there are numerous details to be looked into. The IRA gives you the option to see your hard earned income grow, while at the same time, you get additional tax benefits. It is important to understand these limits that are placed on income, contribution and deduction to ensure that you known exactly what you are eligible for.