Top 10 IRA Contribution Rules

If you want to contribute to your traditional Individual Retirement Account or IRA, you must first pass the Ira contribution rules. There are two rules for eligibility. The first rule is the age eligibility and the second deals with compensation.

1. IRA contribution rules state that you must be under 70.5 years old at the end of the calendar year during which you had set up an IRA. If you have turned 70.5 years old then you would no longer be eligible to contribute.

2. The second IRA contribution rule with regards to eligibility is the existence of compensation or earned income. For you to contribute, you must be receiving some form of compensation either through salaries, wages, commissions, tips, alimonies or bonuses.

3. Compensation also includes a separate payment for maintenance as specified under a decree of divorce or a separation payment. However any amount which you excluded from your income like interests, dividends, pensions, earnings from property investments are not considered as part of compensation.

4. Those not enjoying any form of compensation are generally not eligible to contribute. But in case they are married and they have spouses who are earning compensation then their employed spouses can make contribution in behalf of the spouse

5. If you pass the eligibility tests on IRA contribution rules, then you must first determine your contribution limits. In 2004-2007 the maximum allowable contribution is pegged at $4,000 with catch-up contributions for those over 50 years old but below the prescribed age of 70.5 set at $4,500. In 2008, IRA contribution rules states that that the maximum limit will be marked at $5,000 with catch-up contributions pegged at $6,000.

6. However if you can not contribute more than what you’ve earned for the whole calendar year like if you earned only $3,000 for a particular year your maximum allowable contribution is only set at $3,000 and not the maximum allowable IRA contribution of $4,000.

7. Your traditional IRA contributions are subject to income phased out rule, these contributions are tax-deductible but the deductions are to be phased-out once you’ve reached a fixed level of your adjusted gross income or income less standard adjustments to the income like tax penalties on early withdrawals, moving expenses, alimony and contribution to an individual retirement plan. If you are covered or an active participant in an individual retirement plan, then the phasing out of the tax deductions will start at a lower income level.

8. If you are single, the head of a household and covered by a retirement plan-at-work, full tax deductions is given to those within the AGI range of $50,000 and below. Phased-out deductions is implemented on those AGI sitting at the range of $50,000-$60,000, once you’ve reached $60,000 IRA contribution rules state that there will be no more deductions.

9. Married couples filing jointly and are active participants of a retirement plan, full deductions are applied to those with AGI in the range of $75,000 or less, phased-out deductions are those with AGI $75,000-$85,000. There will be no more tax deductions once you’re over-reached $85,000 limit. No limits for full tax deductions, phased-out deductions or non-allowable deductions are pegged for those who are not active participants of any retirement plan.

10. But IRA contribution rules specify that married joint filers and one of the spouses is covered or an active participant. Full deductions is pegged at an AGI range of $150,000 and below, phased-out deductions for those $150,000-$160,000 and no allowable deductions for those AGIs reaching $160,000 and beyond.

If you are a taxpayer who would like to make an IRA contribution but you are confused, you better check out these Ira contribution rules to make sure you are doing the right thing and are not wasting money and time.

Ira Contribution