An individual retirement arrangement allows a taxpayer to establish an account to allow him to save while deferring or eliminating taxes. By contributing to these tax-advantaged accounts regularly and utilizing the power of compound interest and time, an individual may build a solid nest-egg to help pay his living expenses in retirement. The IRS imposes strict limits on how much a person may contribute to an IRA annually.
Traditional Deductible IRA
For people under age 50, the maximum contribution that may be made to a traditional IRA in all circumstances is $5,000, or the taxable compensation of the taxpayer, whichever is lower. If you are over age 50, you may contribute an additional $1,000, for a total of $6,000, or your taxable compensation, whichever is lower. If you and your spouse do not participate in an employer-sponsored retirement plan, the full amount of the contribution may be deducted from your taxable income.
Deductible IRA Phase-out
Your IRA deduction may be phased out if you are covered by a retirement plan at work, depending on your adjusted gross income. If you are single, your deductible IRA contribution begins to phase out when you reach $56,000 in adjusted gross income, and is eliminated completely at $66,000. The phase-out range for married people who both participate in an employer plan is between $90,000 and $110,000. If you are married with a participating spouse, but you do not take part in an employer plan, the range is from $169,000 to $179,000. Married people who participate in an employer plan with a spouse who does not take part see their deductions for a traditional IRA phase out when they earn between $90,000 and $110,000 in adjusted gross income. You may still contribute the maximum amount regardless of income, but it will not be tax-deductible.
The maximum that may be contributed to a Roth IRA is $5,000 per year if you are age 50 or under and $6,000 per year if you are older than 50. The allowable Roth contribution phases out if you are a single taxpayer with between $107,000 and $122,000 in AGI. For married people filing jointly, the phase-out begins at $169,000 and contributions may not be made if your AGI is over $179,000. For a married person filing separately with AGI of more than zero but less than $10,000 the amount that may be contributed is reduced; with AGI of $10,000 or more, no contribution is allowed.
Roth IRA Benefits
Contributions made to a Roth IRA are not tax deductible. However, you may make withdrawals from a Roth IRA tax-free when you reach age 59 1/2. Roth contributions may be withdrawn tax-free at any time.
Healthcare Savings Account
The Healthcare Savings Account is a type of IRA that people who have high deductible health insurance policies may set money aside to pay expenses related to health care and — possibly — retirement expenses. An individual who has a qualifying high-deductible health plan may contribute $3,050 per year to an HSA, and a person providing coverage to his family may deduct $6,150. You may add $1,000 per year to these amounts if you are over 50. HSA deductions are not dependent on the taxpayer's AGI; they are available to taxpayers of all income levels.
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