There is a maximum adjusted gross income (MAGI) limit for deductible individual retirement accounts, also known as traditional IRAs, for those covered by employer-sponsored retirement plans, such as 401ks. However, individuals without such coverage may deduct contributions no matter what their adjusted gross income (AGI). MAGIs for non-deductible Roth IRAs are the same whether or not the account owner is covered by an employer-sponsored retirement plan.
Maximum AGI for IRA Deduction
As of the time of publication, a single filer covered by an employer-sponsored retirement plan may deduct the full amount of the IRA contribution if his AGI is less than $56,000. Between $56,000 and $66,000, he may make a partial deduction. For married couples filing jointly, with neither spouse covered by a retirement plan at work, the full deduction is available for those with an AGI of under $90,000, with partial deductions up to $110,000. Taxpayers with AGIs over those amounts may still make contributions, but cannot deduct them.
At the time of publication, the maximum contribution limit for both traditional and Roth IRAs is $5,000 for those under the age of 50 and $6,000 for those aged 50 and up. These limits assume contributors had at least that amount in earned income. Those earning less than the maximum contribution amount may contribute 100 percent of earned income. Contributions may not be made to traditional IRAs after the account owner turns 70 1/2. Roth IRA contributors do not have an age limit for contributions as long as they are earning income.
Traditional IRA account holders may begin making withdrawals at the age of 59 1/2, and mandatory withdrawals start at the age of 70 1/2. Because traditional IRA contributions are made with pre-tax dollars, earnings on the accounts are tax-deferred. When contributors begin making withdrawals, the amounts are taxed at ordinary income. Most retirees are in a lower tax bracket than they were during their working years.
If the account owner withdraws assets from the traditional IRA before reaching the age of 59 1/2, the Internal Revenue Service (IRS) not only taxes the amount withdrawn, but levies an additional 10 percent on the withdrawal. There are certain exemptions from the 10 percent penalty. These include the complete and total disability of the IRA owner; payment for higher education for the owner, spouse or child; expenses for first-time home buyers and payment for medical expenses above 7.5 percent of the AGI.
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