April 05, 2013

Remember you have until you file your tax return to make a contribution to a Traditional IRA or Roth IRA for the 2012 tax year.  The annual contribution limit is $5,000 or $6,000 (if you are age 50 or over).

Prior to making the contribution, if you (or your spouse) are an active participant in an employer's qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain income thresholds.  There are also MAGI (income) limits to qualify to make Roth IRA contributions.  The limits are:

2012 IRA contribution limits

Contribution limit: $5,000  or $6,000 (with age 50+ catch up provision)

Income limits:

2012 IRA Contributions

Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer's qualified plan, the income phase-out to contribute is $0 - $10,000.

How does the phase-out work?

If the phase-rules apply to you and your income is below the "full contribution" amount noted above, you can contribute up to the maximum annual contribution. But what if your income falls between these ranges?

1. First, subtract your income from the higher (phase-out complete) amount to get your contribution income potential.
2. Next calculate the phase out range.
3. Then, divide your contribution income potential by the phase-out range.
4. Take the result times your maximum annual contribution amount.
Example: Roth IRA contribution limit for a single person, age 40 with MAGI of $115,000; $10,000 contribution income potential (125,000-115,000);  divided by phase-out range of $15,000 ($125,000 - 110,000);  10,000/15,000= .666  x  $5,000 = $3,300 2012 ROTH IRA contribution limit. Rounding rules apply.

If it's too late for you to make a 2012 contribution, it's not too late to plan for 2013. Here are the limits for 2013.

2013 IRA contribution limits

Contribution limit: $5,500 or $6,500 (with age 50+ catch up provision)

Income limits:

2013 IRA Contributions

Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer's qualified plan, the income phase-out to contribute is $0 - $10,000.

A final thought: If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA.  While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.

Topic: Advice