IS IT TOO LATE TO MAKE MY 2011 IRA CONTRIBUTION? AND HOW MUCH CAN I CONTRIBUTE?

By JC Leahy, MA Accounting
Twitter@taxhelpwhenneed

This article is a response to a question from Brian in Alexandria, Virginia

HAS THE DEADLINE PASSED TO MAKE MY INDIVIDUAL IRA SAVINGS  CONTRIBUTION FOR 2011??

The really great news is that you have until the April 16, 2012 tax filing deadline to open your Traditional IRA savings account and make your 2011 IRA contribution -- if you are eligible.

AM I ELIGIBLE TO CONTRIBUTE SAVINGS TO A TRADITIONAL IRA?

If you (1) have taxable earned income and (2) you are less than 70.5 years old, then you can establish a traditional IRA and contribute money to it. It's that simple.  Earned income includes salary, wages, commissions, self-employment income, alimony, and combat pay.  It does not include any pensions (including Social Security), interest, dividends, or annuities.  In the year you reach the age of 70.5, you can no longer establish or contribute to a traditional IRA.

HOW MUCH CAN I CONTRIBUTE TO MY IRA?

For 2011 (and 2012 also) you can contribute $5,000 per year or the amount of your taxable earned income, whichever is less, to a traditional IRA.  This is true whether you are covered by a retirement plan or not!!  If you have reached the age of 50 during the year, you may contribute an additional $1,000 catch-up contribution.  This makes a total limit of $6,000.


Here's the exception.  It's a good one: If one spouse doesn't work or earns less than $5,000, he/she may establish and contribute to an IRA based on the earnings of the other spouse.  Between them, there is a limit of $10,000, which can be allocated in any way they wish between their two IRA accounts -- provided that neither one's account receives more than $5,000. For example, if the husband makes $100,000 and the wife makes zero of earned income, the wife may contribute up to $5,000 into her traditional IRA and the husband, likewise, may put up to $5,000 into his IRA.  This also applies to the $1,000 catch up contribution.


One other fine point:  If you have a Traditional IRA and also a Roth IRA, the $5,000/$6,000 limit includes both. In other words, you can only contribute $5,000/$6,000 TOTAL between the two.






HOW MUCH OF MY TRADITIONAL IRA CONTRIBUTION CAN I ACTUALLY DEDUCT?
Don’t be confused on this point:  If you are not covered by a retirement plan at work at any time during the year, you can deduct every penny of your traditional IRA contribution.  Period. .


IRA Deduction Phase Out: It's slightly more complicated if you were covered by a retirement plan at work.  In that case, if your "Modified Adjusted Gross Income" (MAGI) is less than certain thresholds, you still get to deduct your entire Traditional IRA contribution.  But you can still make your $5,000/$6,000 contribution to the IRA account -- you just won't be able to deduct it. Here are the Traditional IRA deduction phase-out parameters:

FOR 2011 IRA CONTRIBUTIONS, if you were covered by a retirement plan at work any time during the year, use this table to determine if your modified AGI affects the amount of your deduction. If Your Filing Status Is... And Your Modified AGI Is... Then You Can Take... single or head of household $56,000 or less a full deduction up to the amount of your contribution limit. more than $56,000 but less than $66,000 a partial deduction. $66,000 or more no deduction. married filing jointly or qualifying widow(er) $90,000 or less a full deduction up to the amount of your contribution limit.  more than $90,000 but less than $110,000  a partial deduction.  $110,000 or more  no deduction. married filing separately  less than $10,000  a partial deduction.  $10,000 or more  no deduction. If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "Single" filing status.

For 2012, here are the Traditional IRA Contribution Deduction Limits:

If Your Filing Status Is... And Your Modified AGI Is... Then You Can Take... single or head of household $58,000 or less a full deduction up to the amount of your contribution limit. more than $58,000 but less than $68,000 a partial deduction. $68,000 or more no deduction. married filing jointly or qualifying widow(er) $92,000 or less a full deduction up to the amount of your contribution limit.  more than $92,000 but less than $112,000   a partial deduction.  $112,000 or more  no deduction. married filing separately  less than $10,000   a partial deduction .  $10,000 or more  no deduction. If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "single" filing status.

One other important tax-law quirk: If your filing status is Married Filing Separately, you are screwed!  Your IRA deduction phase out starts at $1 of Modified Adjusted Gross Income and that deduction drops to zero when your MAGI reaches $10,000!!

 In situations when you can't deduct your Traditional IRA contribution, why would you want to make the contribution at all?  There are two reasons.  First, earnings accumulate and compound every year without being diminished by annual income taxes.  You only pay the tax on earnings when you withdraw them in your old age -- and you will probably be in a lower tax bracket then.  Second, if you have a nondeductible Traditional IRA contribution, you get what is called a "basis" in your IRA account.  This just means that when you eventually withdraw from your IRA, the "basis" portion will not be taxable.


If you need assistance with your income tax filing this Tax Season, you might want to contact:

JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com
Silver Spring, Maryland
E-mail: jcleahy@TaxHelpWhenYouNeedIt.com
Tel. (301)537-5365