A traditional IRA is a way to save for retirement that gives you tax advantages.
- Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and
- Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.
Publication 590 explains the details of IRAs including:
- Setting up an IRA
- Contributing to an IRA
- Transferring money or property to and from an IRA
- Handling an inherited IRA
- Receiving distributions (making withdrawals) from an IRA
- Taking a credit for contributions to an IRA
- A comparison of traditional and Roth IRAs
IRA Contribution Limits
The IRA contribution limit does not apply to:
Claiming a tax deduction for your IRA contribution
Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.
Roth IRA contribution limit
The same general contribution limit applies to both Roth and traditional IRAs. However, your Roth IRA contribution might be limited based on your filing status and income.
- 2014 - Amount of Roth IRA Contributions You Can Make for 2014
- 2015 - Amount of Roth IRA Contributions You Can Make for 2015
IRA contributions after age 70½
You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.
If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. It doesn’t matter which spouse earned the compensation.
If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.
Can I contribute to an IRA if I participate in a retirement plan at work?
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.
- Danny, an unmarried college student working part-time, earns $3,500 in 2014. Danny can contribute $3,500, the amount of his compensation, to his IRA for 2014. Danny’s grandmother can make the contribution on his behalf.
- John, 42, has both a traditional IRA and a Roth IRA and can only contribute a total of $5,500 to either one or both in 2014.
- Sarah, age 52, is married with no taxable compensation for 2014. She and her husband reported taxable compensation of $60,000 on their 2014 joint return. Sarah may contribute $6,500 to her IRA for 2014 ($5,500 plus an additional $1,000 contribution for age 50 and over).
Tax on excess IRA contributions
An excess IRA contribution occurs if you:
- Contribute more than the contribution limit.
- Make a regular IRA contribution to a traditional IRA at age 70½ or older.
- Make an improper rollover contribution to an IRA.
Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.
To avoid the excess contributions tax:
- withdraw the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
- withdraw any income earned on the excess contribution.
See Pub 590 for certain conditions that may allow you to avoid including withdrawals of excess contributions in your gross income.