An IRA is an Individual Retirement Account. The IRA allows taxpayers to save money for retirement in a tax-advantaged manner. There are two types of non-business IRA accounts. With a traditional IRA, contributions are tax deductible for certain taxpayers. In addition, all monies within the account grow tax-deferred until withdrawal. A Roth IRA offers no deduction for contributions. However, the Roth account also offers tax-deferred growth. More importantly, money withdrawn from a Roth IRA account in retirement is tax-free.
To prevent abuse of the powerful tax advantages offered by IRAs, the IRS limits the total allowable IRA contribution each taxpayer can make. In addition, there are income limits for tax-deductible IRA contributions as well as limits on high-income taxpayers making Roth IRA contributions.
IRA Contribution Limits 2012
The 2012 IRA contribution limit is the same as it the 2011 IRA contribution limit. Taxpayers under age 50 may contribute up to $5,000 annually to an IRA account. Taxpayers age 50 and older may make an additional catch-up IRA contribution of up to $1,000, for a total IRA contribution of $6,000 each year.
2012 Roth IRA Income Limits
Contributions to a traditional IRA are allowed for all taxpayers regardless of income. However, contributions are only tax deductible for those whose income falls beneath certain limits.
For Roth IRAs, contributions are only allowed for taxpayers whose modified Adjusted Gross Income, or MAGI is below certain thresholds. For 2012, the Roth income limits were adjusted for inflation and set by the IRS in late 2011.
Taxpayers who are married filing jointly may contribute the full amount to a Roth IRA if their MAGI is less than $173,000 for 2012. For married couples with an MAGI between $173,000 and $183,000, the allowable contribution is reduced. Married taxpayers with MAGI over $183,000 are not allowed to make a Roth IRA contribution.
For single taxpayers, the limits are lower. Taxpayers with an MAGI of less than $110,000 may make the full $5,000 Roth IRA contribution ($6,000 if over age 50). Single taxpayers with MAGIs above $110,000, but less than $125,000 may make a reduced Roth IRA contribution. Those with incomes above $125,000 may not make a Roth IRA contribution for 2012.
Keep in mind that the income limits for Roth IRA conversions were eliminated permanently. That means high-income taxpayers can still get money into a Roth IRA by doing a conversion from a traditional IRA account.
To do a Roth conversion, contribute to a regular IRA account. Convert the traditional IRA account to a Roth IRA account by paying the taxes that would be due on the IRA monies if they were withdrawn. (No penalties, however). Since the amount contributed counts as part of the basis, the taxable amount may be relatively low.
Related posts:
[...] looking for how a 529 plan works.2012 529 Contribution LimitsUnlike IRA plans, where there are new 2012 IRA contribution limits, or other child tax credits, there is no income limits for 529 plans. That means that you can [...]
[...] most people have for lowering their taxes is to contribute to an IRA account. Of course, there are limits on IRA contributions, so that only offers so much relief. Otherwise, the best you can do is find every possible tax [...]