Sat, April 04, 2009
Make 2008 IRA Contributions Before April 15th
If you haven’t yet made a 2008 contribution to an IRA or Roth IRA, remember that you must do so before April 15th. You can contribute as much as $5,000 to an IRA for 2008 provided you qualify, and you can contribute an additional $1,000 if you turned 50 during 2008. Permitted contributions are limited to the lesser of your compensation or the contribution limit that applies to your age and Modified Adjusted Gross Income status.
Phase-Out Income Rules
Typically, a fully deductible contribution can be made if your Modified Adjusted Gross Income (MAGI) falls below the applicable limit.
The MAGI for IRA contributions is calculated by taking AGI (not including any IRA deductions) and adding to that any deduction or exclusion amounts taken for
student loan interest deduction,
foreign earned income/housing exclusion,
excluded qualified savings bond interest,
exclusion of employer-provided adoption benefits,
domestic production activities deduction or
tuition/fees deduction.
If your MAGI is within a phase-out range applicable to you, the size of your deduction is reduced. The IRS provides worksheets for calculating phase-outs; the amount of deduction lost depends on how far your income goes into the phase-out range. For example, if the range is $159,000 - $169,000 and your MAGI is at the midpoint of the range ($164,000), 50% of the deduction is lost. Once MAGI reaches the top of the range, you can’t deduct any of your contribution, but you might want to set up a nondeductible IRA (see below).
Roth IRAs:
Roth IRA contributions are not deductible, but withdrawals during retirement are tax-free. Roth contribution phase-outs apply when MAGI is
$101,000 – $116,000 - Single
$159,000 – $169,000 - Married, Filing Jointly
So for taxpayers with MAGIs above $116,000 (single) or $169,000 (MFJ), no Roth contribution is permitted.
Traditional IRAs:
Traditional IRA contributions are deductible provided the contributor does not make too high an income; a deduction for contributions may be available even if the individual is covered by a retirement plan.
For filers not covered by any employer-sponsored retirement plan in 2008, there is no income limit for deductible IRAs.
For couples in which one member is an active participant in an employer plan but the other is not, the person who does not participate in an employer plan may make fully deductible contributions according to the same MAGI phase-out range as the Roth income limits: $159,000 to $169,000.
Single taxpayers actively participating in a plan can make deductible contributions with an MAGI phase-out range of $53,000 - $63,000. MFJ couples in which both members participate in a plan can do so with a phase-out range of $85,000 - $105,000.
Non-Deductible IRA contributions
It’s also possible to make non-deductible IRA contributions if your income is too high to qualify for the IRA deduction. Since you need to keep track of the deductibility status of your IRA contributions indefinitely, it is probably wise not to commingle deductible and non-deductible IRA contributions in a single IRA account. Even if your IRA custodian is keeping track of the contributions now, things might get complicated in the future if the custodian is acquired by another firm.
You have until April 15, 2010 to make 2009 IRA contributions, but unless you’re uncertain about whether your income will be too high to make qualified contributions, there’s no reason not to make 2009 contributions this year. If you have a properly diversified portfolio, buying while the markets are in a dither should pay off in the long-term.
This is not individualized tax advice; as always, you should consult with a tax professional to be sure that all aspects of your specific tax situation have been considered before making an IRA contribution.