Individual Retirement Accounts (IRA’s) are personal retirement accounts that offer tax advantages. Roth IRA’s and traditional IRA’s have distinguishing features with respect to contributions, withdrawals, and tax advantages. Below is a breakout comparison of the contribution differences between the two.
Contributions for a Traditional IRA
Contributions to a traditional IRA are considered before-tax contributions and these contributions may be either deductible or non deductible for tax purposes. There are a few factors that determine the eligibility for the tax deduction.
In general, a tax payer who is not covered by a retirement plan can make a tax-deductible contribution to an IRA regardless of income. However, if either the tax payer or their spouse is covered by an employer sponsored retirement plan, the ability to deduct contributions may be limited. There are certain income restrictions depending on the method of income tax filing used and the amount of adjusted gross income. Let’s look at those numbers for 2010 and 2011.
A single tax payer whose adjusted gross income (AGI) is less than $56,000 is eligible for a full deduction. If the AGI is over $66,000 than no deduction is permitted and if the AGI falls between $56,000 and $66,000 a partial deduction may be made. These rules are for both 2010 and 2011.
In 2010 for those who are married and filing jointly, if the adjusted gross income (AGI) is less than $89,000 the taxpayer is eligible for a full deduction. However, if the AGI is over $109,000, than no deduction is permitted. If the AGI falls between $89,000 and $109,000 a partial deduction may be made.
In 2011, there is a bump in those limits for those whose AGI is $90,000 and under for a full deduction. An AGI of $110,000 and over is not eligible for the deduction and if the AGI falls between the two, a partial deduction may be taken.
For the tax year 2010 and 2011, the maximum contribution amount is $5,000 if you are 49 years of age or younger by the end of the tax year. If you are 50 years of age or older before the end of the tax year, you may make an additional contribution for $1,000 know as a ‘catch-up’ bringing your total maximum contribution to $6000.
Additionally you may no longer make contributions for the year you turn 70 ½ and later years.
Contributions to a Roth IRA
Contributions to a Roth IRA are considered after-tax contributions. This means you will not have the ability to deduct your contributions from your income tax. However, you may not pay tax when you withdraw your money. This is a key distinction between a traditional IRA and a Roth IRA.
The IRS prohibits people who, by IRS standards, have high incomes from contributing to a Roth IRA. The IRS has set the income limits for a full contribution into a Roth IRA for 2010 at $177,000 for taxpayers filing married jointly and $120,000 for single taxpayers. Contributions to a Roth IRA are phased-out at lower income levels. To make the full contribution, the tax payer must make below $167,000 for filing joint married and below $105,000 if filing single.
For 2011, those limits get bumped up to $179,000 for taxpayers who are married filing jointly and taxpayers who are filing single at $122,000. There is a phase-out for contributions at lower income levels beginning at $169,000 for married filers and at $107,000 for single filers. Taxpayers who make below the phase-out numbers can contribute the full amount to a Roth IRA.
The amount of money a taxpayer can contribute to a Roth, assuming they are eligible for the full contribution is the same as it is for a traditional IRA with the same ‘catch-up’ provisions depending on the taxpayer’s age.
A tax payer is allowed to make contributions to a Roth IRA if they are eligible after they turn 70 1/2 and older. This is another key distinction between a traditional IRA and a Roth IRA.
Regardless of IRA type, a taxpayer must have earned income in order to contribute.
Learn More About Contribution Limits
You can learn more about retirement account contribution limits in our special.