About 20 years ago Congress passed a law that still provides confusion to both taxpayers and many members of the media. Many people thought the new law outlawed IRA contributions if you were covered by a retirement plan at work. Assuming you have sufficient compensation or self-employment earnings, the law simply disallowed the deduction if you were covered by a retirement plan AND your adjusted gross income was over a certain threshold.
The law never eliminated the ability to make an IRA contribution.
In general, the rules are as follows (assumes you and your spouse have at least combined earnings of $10-12,000 or more (if over age 49):
- Not covered by a retirement plan - Both spouses can deduct up to $5,000 (in 2012, increases to $5,500 in 2013) plus if age 50 or over, you can each contribute another $1,000 for a total of $6,000 each.
- If both are covered by a retirement plan, you can still deduct a full IRA until your combined adjusted gross income hits $92,000. At this point, the deduction is reduced 50 cents for each dollar increase. Once you hit $112,000, no more deduction (the numbers for single are $58,000-$68,000).
- One covered by retirement plan, one not. The non-covered spouse can deduct a full IRA until the couple's adjusted gross income hits $173,000 and is fully phased out at $183,000.
The ROTH IRA makes it a little more confusing. You can only contribute up to $5,000 ($6,000 if 50 and over) between a regular IRA and a ROTH IRA. This can be allocated in any manner you want, but the combined amount cannot exceed the limit. However, ROTH IRA's are reduced once your adjusted gross income hits $173,000 and is fully disallowed at $183,000 (same limits for one non-active spouse). The single limits start at $110,000 and is fully phased out at $125,000.
Remember, an IRA or ROTH IRA contribution for 2012 tax returns must be fully funded by April 15, 2013. This applies even if you get an extension of time to file, it does not extend the IRA due date.
Also, if you file early in the year and get a nice size refund from the IRS, you can use that refund to fund your IRA. There is no requirement to have the money in the IRA before you file your return. You can even have part of your refund automatically deposited into your IRA by the IRS.
We have roughly 19 days of tax season left and we know they will be hectic for all of us. Spring planting is just around the corner for our farmers, while us CPA's are finishing up our "harvest".