IRA Rules

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Below are the Roth IRA contribution rules.

What are the differences between Roth IRA contribution rules vs traditional IRA Contribution Rules?

One of the differences between a Roth IRA and a traditional IRA is that you may contribute to a Roth IRA regardless of your age (even after age 70 1/2). Another difference is that you are able to leave amounts in your Roth IRA as long as you live. But, in a Roth IRA, you cannot deduct contributions as you can in a traditional IRA. If you meet the requirements of a Roth IRA, qualified distributions are tax free.

When should I contribute to a Roth IRA?

Generally you can contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income (AGI) is less than the amount shown for your tax filing status (see table below). Compensation is the same as defined for a Traditional IRA.

Below is a table of the Roth IRA contribution limitations based on tax filing status and modified adjusted gross income. The table below is found in the IRS Publication 17 page 125.

If a contribution is made only to a Roth IRA, the maximum contribution limit is the lesser of:

• $4,000 ($5,000 if age 50 or older) or
• your taxable compensation.

There are limits based on your modified adjusted gross income which can reduce your allowable contribution. The table above shows the limitation based on tax filing status and modified AGI.

If you contribute to both Roth IRA and traditional IRAs, your contribution limit for Roth IRAs must be reduced by all your contributions for the year to all IRAs other than Roth IRAs. If you exceed the allowable limit of your contributions to a Roth IRA, you are subject to a 6% excise tax.

You must meet the IRA contribution rules to contribute to an IRA. If you want to contribute to a traditional IRA, you must meet the IRA contribution rules for traditional IRA. If you want to contribute to a Roth IRA, you must meet the IRA contribution rules for Roth IRA which are slightly different from those of traditional IRA’s.

Traditional IRA contributions rules

To contribute to a Traditional IRA, you must:

1. be under age 70 1/2 and
2. have taxable compensation

What is compensation?

Compensation includes:

• wages
• salaries
• commissions
• tips
• bonuses
• professional fees
• earnings from self employment
• alimony or separate maintenance payments included in total income also considered compensation for Traditional IRA purposes.

Beginning in 2004, any nontaxable combat pay you receive is included as compensation for IRAs. Compensation does not include interest, rents, dividends, pension and annuity income, or income not included in total income on the tax return (other than nontaxable combat pay for the military).

If you have more than one Traditional IRA, you must combine all of them and treat them as one when figuring out the amount that you can contribute for the year.

Traditional IRA contribution limit

Contributions to a Traditional IRA cannot exceed the smaller of:

• your total taxable compensation or
• $5,000 ($6,000 if age 50 or older on December 31) – for 2008 tax year
• $4,000 ($5,000 if age 50 or older on December 31) – for 2007 tax year

Spousal IRA contribution rules

If you have earned income, you may establish a Traditional IRA for your spouse but you must be filing a joint tax return. Your spouse does not need to have earned income. When there are two separate IRAs , no more than the IRA contribution limit may be contributed to either one. The total combined contributions to both IRAs cannot exceed the smaller of:

1. your and your spouse’s total taxable compensation or
2. $8,000 ($9,000 if one of your is age 50 or older or $10,000 if both of you are age 50 or older)

If you can not contribute to your own Traditional IRA because your age is over 70 1/2 you may still contribute to your spouse’s IRA until he or she reaches age 70 1/2 but the contribution limit is still $4,000 or $5,000 if 50 or older. See Roth IRA Contribution Rules for the IRS tax rules governing Roth IRA contributions.