April 23. 2012 | Jim Wagenmann
Individual Retirement Accounts
Any taxpayer with earned income, wages, or self-employment income can contribute to an Individual Retirement Account (IRA). The contribution limit for 2011 is the lesser of earned income or $5,000. If you were age 50 or older by December 31, 2011, you may also contribute an additional $1,000 as a catch-up contribution for a total of $6,000. Contributions to an IRA could have been made at any time during 2011 or they can also be made before April 17, 2012, and earmarked as 2011 contributions.
The tax deduction rules are somewhat complex and depend upon coverage by an employer plan and your income level. If you and/or your spouse are not covered by an employer plan, you may contribute to a tax-deductible IRA no matter what your income level is. If you and your spouse are covered by an employer plan, the deductibility of the IRA depends upon your adjusted gross income (AGI) shown on your tax return. If you are single and your adjusted gross income is less than $56,000, the IRA would be fully deductible. If your AGI is between $56,000 and $66,000, the deductible portion of the IRA contribution is reduced while the nondeductible portion is increased. If your AGI is above $66,000, the entire IRA contribution becomes nondeductible even though it can still be retained by the IRA account. If you are married filing jointly, the income limits for computing the amount of tax-deductible IRA contributions are AGI between $90,000 and $110,000. If you are married filing a separate return, the tax deductible income limits are at AGI of $0.00 to $10,000.
One point to consider is that if you are married filing separate and you are under a separate maintenance agreement and you have lived apart for the entire year, the single taxpayer rules will apply rather than the married filing separate rules. Another scenario to keep in mind is where you are married filing jointly and only one spouse is covered by an employer plan. The income limits for calculating the deductible portion of an IRA contribution are $169,000 to $179,000 of combined AGI. The covered spouse will still have to follow the married filing jointly rules above.
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