Contributions to Traditional IRAs
Anyone under age 70½ who receives compensation—salary, self-employment income, commissions or alimony—or is married to someone who receives compensation and files jointly is eligible to make a contribution to an IRA.
Grace Period
Eligible individuals may make IRA contributions up until the due date for filing the federal income tax return. For example, an individual could make an IRA contribution on April 15, 2008 that would be effective for tax year 2007. Note the time for making an IRA contribution cannot be extended past this filing date by asking for an extension.
Individual Workers
Annual contributions to a traditional IRA, a Roth IRA, or a combination of the two are limited to the lesser of 100% of earned income or a dollar amount that changes periodically. Compensation includes earnings from wages, salaries, tips, professional fees, bonuses and any other earnings a taxpayer receives for providing personal services. In addition, alimony and separate-maintenance payments are also considered compensation for IRA purposes. Compensation does not include income derived from investments or retirement income. Disability payments and nonqualified deferred compensation are NOT considered compensation for IRA purposes. Taxpayers may contribute less than the full deductible amount.
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") increased the contribution limits for both traditional and Roth IRAs beginning in 2002. Further, taxpayers who have reached at least age 50 by December 31 of a year are permitted to make additional "catch-up" contributions to IRAs. The new limits are summarized in the following schedule:
| Contribution Limit
Under Age 50 | Contribution Limit
Age 50 and Over |
2002 | $3,000 | $3,500 |
2003 | $3,000 | $3,500 |
2004 | $3,000 | $3,500 |
2005 | $4,000 | $4,500 |
2006 | $4,000 | $5,000 |
2007 | $4,000 | $5,000 |
2008+ | $5,000 | $6,000 |
| | |
Beginning in 2009, the annual limits on IRA contributions and catch-ups will be inflation-indexed.
The 100%-of-earned-income limitation on IRA contributions has not changed. Thus, a person who has only investment income may not contribute to an IRA.
Spousal IRAs
A working spouse may set up and contribute to an IRA for a non-working (or part-time) spouse, based on the earnings of the working spouse. The non-working spouse's IRA is often called a "spousal IRA." The spousal IRA deduction is $5,000 in 2008 when one spouse has compensation or earnings of less than $5,000 for the year ($6,000 for age 50 and over). However, the combined annual IRA contributions of both spouses cannot exceed their combined compensation for the year.
The annual limit on spousal IRA contributions rises with the general increase in IRA contribution limits.
Excess Contributions
Contributions that exceed the allowable limits may be refunded without penalty within a limited period of time—generally before the tax return for the year is required to be filed, including extensions. If the excess remains in the IRA beyond this grace period, it is subject to a 6% annual excise tax until withdrawn. The interest attributable to excess contributions may also avoid the 6% penalty if refunded before the tax filing due date. This interest is taxable, and, if the taxpayer is under age 59½, is subject to the 10% penalty for premature distributions (unless an exception applies).