This is the time of year when Individual Retirement Accounts really come into focus. While it is too late to take advantage of most other ways to shave your 2010 income tax bill, a deductible IRA contribution will work wonders for your wallet. And savers have more time this year to put money into an IRA and count it for last year. The federal government’s recognition of Emancipation Day, a holiday observed in the District of Columbia that falls on April 15, means you have until April 18 to contribute to your IRA for 2010.
Unfortunately, millions of Americans don’t contribute to IRAs. Confusion over the eligibility rules likely play a large role in why they miss out. The rules are somewhat tricky.
If you don’t have retirement coverage at work, you likely can invest in a traditional IRA and deduct your contributions, regardless of your income. If you participate in a 401(k) plan or other workplace retirement programs, your deduction begins to phase out in 2010 at adjusted gross income (AGI) above $56,000 (singles) or $89,000 (joint filers). It ends completely at $66,000 (singles) or $109,000 (joint filers). If you don’t participate in a company sponsored plan but your spouse does, your contributions phase out between $167,000 and $177,000 of AGI. But fear not, you can always contribute to a non-deductible traditional IRA without any phase-outs provided you or your spouse have a sufficient amount of earned income.
The contribution eligibility rules for Roth IRAs are somewhat different than those for traditional IRAs. The ability to contribute phases out at AGI between $105,000 and $120,000 for singles and between $167,000 and $177,000 for joint filers in 2010, regardless of whether you or your spouse participates in a workplace retirement plan. Keep in mind you or your spouse must have taxable compensation (earned income) in order to contribute to either a traditional and Roth IRAs, which may eliminate some people, including retirees. Also, you can’t contribute to a traditional IRA beginning with the year you attain age 70 ½; no such age limit exists with respect to Roth IRA contributions. The 2010 aggregate contribution limit for all IRAs, including Roths, is $5,000 plus an additional $1,000 if you are age 50 or older on December 31, 2010.
Conversions to Roth IRAs are still very attractive because you’re able to take tax-free withdrawals (when certain requirements are met) and no minimum distributions are required during your lifetime. However, keep in mind that you cannot spread the taxable conversion amount over two taxable years like you can with conversions done in 2010. Also, Roth conversions are now universally available, regardless of income or tax filing status. That was one change in the law that does not sunset or change without future legislative action; it’s permanent (at least for now!)
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2011 Ed Slott and Company, LLC
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