Can Employees Open an IRA?

by Herb Kirchhoff

A traditional individual retirement account (IRA) allows you to build up retirement savings on a tax-deferred basis, with no taxes coming due until after you retire. You can open an IRA if you are an employee, and if you already have a 401(k) plan. However, your IRA contribution tax deduction may be reduced if you are under an employer’s plan.

Opening Requirements

The basic requirements you must meet to open a traditional tax-deferred IRA are that you (or your spouse if married filing jointly) have taxable compensation and are under age 70 1/2. Compensation includes wages, salaries, tips, professional fees and other money received from your employer for doing work. If both you and your spouse are under age 70 1/2, and each have taxable compensation, you each can open an IRA in your own name. But you can’t both own the same IRA.

Contribution Limits

If your employer has no retirement plan, you can contribute up to $5,000 to your IRA each year. If you and your spouse each have an IRA, and neither of you are covered by an employer’s retirement plan, each of you can contribute $5,000 to your respective IRAs. If you have more than one IRA in your own name, the $5,000 limit applies to all of your accounts. That means if you contributed $2,000 to one IRA, you can only contribute $3,000, at most, to another IRA. If you are over age 50, your IRA contribution limit is $6,000.

Income Limit

If you and/or your spouse are covered by an employer’s retirement plan, your maximum contribution to your IRA may be limited if you exceed certain income limits. You can make a fully deductible $5,000 IRA contribution if you made less than $56,000 if filing sas a single, or $90,000 if married and filing jointly. If you are single, your deductible contribution is phased out for income between $56,000 and $66,000. If you made over $66,000 you can’t make any contribution to your IRA. If married and filing jointly, your deductible contribution and that of your spouse phases out for income between $90,000 and $110,000. There is no contribution allowed if your joint income exceeds $110,000. You are considered covered if you are eligible to join your employer’s retirement plan even if you choose not to participate.

Opening an IRA

You can open an IRA with a bank, brokerage, mutual fund, life insurance company or other fiduciary institution. The entity must be approved by the Internal Revenue Service to act as an IRA custodian, and it must give you an absolute right to access your IRA money at all times. The custodian can’t accept direct contributions beyond the annual limit, but can allow rollover contributions of any amount. Your direct contributions must be in cash. Your assets and earnings can continue building on a tax-deferred basis until you turn age 70 1/2, at which point you must start making required minimum distributions.

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