If you have earned income, and you are not covered by an employer’s qualified retirement plan, you’re entitled to set money aside in a Traditional IRA and take a tax deduction. Married couples filing jointly can each set money aside every year.
Even if you are covered by an employer’s plan, you may still contribute to a Traditional IRA, where your savings will grow on a tax-deferred basis. Whether you can take the tax deduction depends upon your income and marital status. You may also want to consider a Roth IRA as an alternative.
Also, legislation passed by Congress allows families within certain income ranges to take an IRA Tax Credit of up to $1,000 for their contribution.
The Traditional IRA annual contribution limits for individuals who have earned income are as follows:
| Year | Contribution Amount |
| 2007 | $4,000 |
| 2008 | $5,000 |
| 2009 and later | $5,000 plus indexed adjustment |
Individuals who have reached age 50 or older before the end of the year are allowed to make catch-up contributions in addition to their basic annual IRA contribution. The catch-up amount is as follows:
| Year | Catch Up Amount |
| 2007 and later | $1,000 |
If you turn age 50 or older, you are allowed to contribute $1,000 in addition to your regular contribution as long as you have earned income to support the catch-up amount. Your total 2007 contribution will then be $5,000. In 2008, your contribution limit will be $6,000. If you have a Traditional IRA, the entire contribution may be tax deductible.
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For taxpayers who are covered by an employer’s retirement plan, a full tax deduction is allowed for an IRA contribution up to specified income levels. Here are the current ranges at which you may be allowed to take a tax deduction for a Traditional IRA contribution.
| | Single Filer | Single Filer | Married Filing Jointly | Married Filing Jointly |
Tax Year
| Full Deduction
| Partial Deduction
| Full Deduction
| Partial Deduction
|
2007
| Up to $52,000
| $52,000 - $62,000
|
Up to $83,000
| $83,000 - $103,000
|
2008
| Up to $53,000
| $53,000 - $63,000
|
Up to $85,000
| $85,000 - $105,000
|
If you are single and do not participate in an employer sponsored retirement plan, all Traditional IRA contributions are tax deductible, regardless of your income. The same is true if you are married and file a joint tax return and both you and your spouse are not eligible participants in an employer sponsored retirement plan.
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If you are married and filing jointly, and your spouse is a participant in an employer sponsored plan and you are not, your Traditional IRA contribution is fully tax deductible if your 2007 joint Modified Adjusted Gross Income (MAGI) is less than $156,000. If the couple's MAGI is greater than $156,000, but less than $166,000, the non-active participant spouse's IRA contribution will only be partially deductible. If the couple's MAGI is 166,000 or greater, no IRA deduction may be taken. In 2008, the Modified Adjusted Gross Income (MAGI) limits will increase to $159,000 for a full tax deduction and phase out at $169,000.
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The Required Minimum Distribution (RMD) for a Traditional IRA begins in the calendar year in which you attain age 70 1/2.
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In general, there is a 10% penalty tax on IRA distributions before the owner reaches age 59 1/2. Exceptions for distributions upon the death or disability of the IRA owner are allowed. See below for two exceptions, permitting penalty-free IRA withdrawals before retirement.
The costs of tuition, fees, books, supplies and equipment required for college or graduate school constitute qualified expenses. These costs may be incurred by the taxpayer, his or her spouse, their children or grandchildren. There is no dollar limit on such distributions and no limit on the taxpayer’s income at the time of the distribution. However, the distributions have to be coordinated with other education tax incentives created by Congress.
Up to $10,000 may be withdrawn from an IRA without penalty if it is used within 120 days to buy or build a "first" home that serves as the taxpayer’s principal residence. The tax code defines a first-time homebuyer as anyone who has not owned a home for two years before a home purchase. Thus, it is possible for some taxpayers to be first-time homebuyers more than once, but the $10,000 limit is a lifetime cap.
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