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5 Things To Know About IRA Contributions

By manybanking.com Staff
Individual Retirement Accounts (IRAs) allow you to invest in a savings plan for your retirement all while enjoying big tax benefits today. IRAs contain investments like stocks, mutual funds, CDs and bonds.

Category Product: 
Savings
Category Finance: 
Personal Finance
Keywords: 
IRA, Individual Retirement Account, 401(k), Future, Retirement, Savings, Wealth, Investments, Spending
Introduction: 

By manybanking.com Staff
Individual Retirement Accounts (IRAs) allow you to invest in a savings plan for your retirement all while enjoying big tax benefits today. IRAs contain investments like stocks, mutual funds, CDs and bonds.

According to your asset allocation, your contributions are directed towards these investments and are allowed to grow tax-deferred. Taxes are not levied on an IRA account until you make withdrawals in retirement.

Because IRA earnings are untaxed, it pays to contribute as much as possible to take full advantage of compounding interest. There are numerous rules when it comes to IRA contributions, however. Contribution and deduction limits vary depending on your income, your spouse’s income, your age and whether or not you participate in a workplace retirement plan.

Here are 5 things you should keep in mind when planning your IRA contribution:

1. For the 2009 tax year, you can only contribute up to $5,000. Those who are 50 years old or older can contribute up to $6,000. If you are married and filing jointly, your total combined contributions cannot exceed $10,000 or $12,000 if both spouses are 50 or older. Though, these contributions do not have to be limited to one IRA account. You can spread your contributions over several accounts, but the total amount cannot exceed the contribution limit. After 2009, the limit will likely be adjusted upwards for inflation.

2. You can only contribute up to what you earn within the year to your contribution. Consequently, if you earn less than $5,000, you cannot contribute the maximum amount to your IRA. The exception to this rule is if you are married and file jointly. In this case, you can contribute up to the limit of your income plus your spouse’s income and less his/her total IRA contribution. For example, if you are a student and earn $0, but your spouse earns $25,000, you can both still contribute the combined limit of $10,000 to an IRA because that is less than your combined income.

3. All of your contributions to a Traditional IRA are tax deductible if you do not participate in a workplace retirement plan. If you have a Roth IRA, however, the contributions are not tax deductible. Contributions to Roth IRAs are after taxes, but you do not have to pay taxes on the withdrawals. Income limitations for Roth IRA eligibility are $166,000 for married filing jointly and $116,000 for single filers.

4. If you participate in a workplace retirement plan, your tax deduction is reduced. For 2009, the tax deduction begins to phase out at $55,000 for single filers and disappears at $65,000. For joint filers, it phases out starting at $89,000 and disappears at $109,000. If your spouse participates in an employee retirement plan and you do not, you can take the full tax deduction up to a combined income of $166,000. However, the deduction phases out after that amount and is no longer available at $176,000.

5. You can make contributions to your IRA accounts up to filing day for that tax year.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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According to your asset allocation, your contributions are directed towards these investments and are allowed to grow tax-deferred. Taxes are not levied on an IRA account until you make withdrawals in retirement.

Because IRA earnings are untaxed, it pays to contribute as much as possible to take full advantage of compounding interest. There are numerous rules when it comes to IRA contributions, however. Contribution and deduction limits vary depending on your income, your spouse’s income, your age and whether or not you participate in a workplace retirement plan.

Here are 5 things you should keep in mind when planning your IRA contribution:

1. For the 2009 tax year, you can only contribute up to $5,000. Those who are 50 years old or older can contribute up to $6,000. If you are married and filing jointly, your total combined contributions cannot exceed $10,000 or $12,000 if both spouses are 50 or older. Though, these contributions do not have to be limited to one IRA account. You can spread your contributions over several accounts, but the total amount cannot exceed the contribution limit. After 2009, the limit will likely be adjusted upwards for inflation.

2. You can only contribute up to what you earn within the year to your contribution. Consequently, if you earn less than $5,000, you cannot contribute the maximum amount to your IRA. The exception to this rule is if you are married and file jointly. In this case, you can contribute up to the limit of your income plus your spouse’s income and less his/her total IRA contribution. For example, if you are a student and earn $0, but your spouse earns $25,000, you can both still contribute the combined limit of $10,000 to an IRA because that is less than your combined income.

3. All of your contributions to a Traditional IRA are tax deductible if you do not participate in a workplace retirement plan. If you have a Roth IRA, however, the contributions are not tax deductible. Contributions to Roth IRAs are after taxes, but you do not have to pay taxes on the withdrawals. Income limitations for Roth IRA eligibility are $166,000 for married filing jointly and $116,000 for single filers.

4. If you participate in a workplace retirement plan, your tax deduction is reduced. For 2009, the tax deduction begins to phase out at $55,000 for single filers and disappears at $65,000. For joint filers, it phases out starting at $89,000 and disappears at $109,000. If your spouse participates in an employee retirement plan and you do not, you can take the full tax deduction up to a combined income of $166,000. However, the deduction phases out after that amount and is no longer available at $176,000.

5. You can make contributions to your IRA accounts up to filing day for that tax year.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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