Deductibility Limits on Traditional IRA Contributions & IRA Contribution Limits from 2002 to 2012

(November, 2011)

The traditional & Roth IRAs present many more retirement savings tools for investors & American employees who have careers and wish to save towards their retirement. It is important to understand that the government’s social security benefits may be able to cover a portion of your retirement needs, but not all of it; that’s certain. It is therefore your responsibility to save for your own retirement and making sure the lifestyle you plan to have upon retirement is easily financeable using your accumulated retirement savings. In this article, we explore the world of traditional IRA, its contribution limits, spousal contributions and deductibility limits for 2008.

Traditional IRA Contribution Limits from 2002 to 2012

For any tax year, you may contribute the lesser of:

i) The Regular contribution limit or

ii) 100% of your taxable earned compensation

Note: The additional catch up contribution limit is for people 50 years or over.

Spousal Traditional IRA Contribution

You may contribute to your Spousal Traditional IRA on behalf of your non-working spouse and the contribution limits listed above apply to this case. Also note that if you contribute to your own IRA apart from your spouse’s IRA, then you must maintain separate IRA accounts as you cannot hold joint IRA accounts. Also note that in order for you to make a spousal IRA contribution, you and your spouse must file a joint income tax return. Also as a rule of thumb, your combined compensation income earned should not exceed the total value of your contributions for that year.

IRA Contribution Deadline

IRA contributions must be made by April 15th of the year for the preceding year. If April 15th falls on a weekend, the deadline will be the next business day following the weekend. For instance, the IRA contribution deadline for 2008 would be April 15th, 2009 which happens to be a Wednesday. If you happen to make your contribution after you file your tax return, be sure to let your tax accountant know this. Thus for the year 2008, your contribution dates would be January 1st, 2008 to April 15th, 2009. If you filed your income tax on February 27th, 2009 and made your IRA contributions on April 10th, 2009 (just 5 days before the deadline), make sure you let your tax accountant know for tax deductibility purposes.

Age Restrictions for Traditional IRA Contributions

You are not permitted to make traditional IRA contributions from the year you turn 70 and ½ years of age. You can however make a contribution for the preceding year. For instance, if you turned 70 and ½ years of age in 2012, you are still allowed to make contributions for the 2011 tax year from January 1st, 2012 to April 15th, 2012.

If you make your IRA contributions between January 1st, 2012 to April 15th, 2012 for the preceding tax year (2011), make sure you select this option on your IRA contribution form; this designation is very important.

Inform IRS of the Tax Year

The IRA participant contribution deadline for 2011 will be April 15th, 2012. If you happen to make any IRA (both Roth and Traditional IRA) contributions between January 1st to April 15th, 2012, be sure to indicate for which year you are making the contribution on any forms you fill out. If you do not do this, the IRA custodian will not know what year it is for and will take it as for the 2012 tax year when you really want to contribute for the 2011 tax year.

Can You Deduct your Traditional IRA Contributions?

Making a deduction for your contributions to a Traditional IRA depends on three factors namely:

i) Your tax-filing status

ii) Your modified adjusted gross income (MAGI)

iii) Your participant status (whether you are an Active participant or not).

How do you determine if you are an active participant? Well you can ask your employer or your tax accountant, however if you contribute to any of the following employer-sponsored retirement plans, then you are an Active participant:

- 401k plans
- Defined benefit plans
- SEP IRA
- SIMPLE IRA
- Profit sharing plans
- Money purchase pension plan

The rules for each of these plans differ, so it is best advised to check with your plan administrator. For instance, you are considered an active participant in a profit-sharing plan if your employer contributes on your behalf in a year that is different than the intended year. For instance, if your employer makes a profit-sharing contribution to your plan in 2008 but it is meant for the year 2009, you would still be considered an active participant for the year 2008.

In the case of a money purchase pension plan, you are termed an active participant if you are entitled to receive the contribution, irrespective of when the actual contribution is made. For instance in 2008 if you are eligible to receive a money purchase pension plan contribution, it does not matter if you receive that contribution in 2009; you will still considered an active participant for the 2008 tax year.
Note that the active participant box must be checked on Form W-2.

Use the following table to determine what category you fall under (single & head of household, married filing joint or married filing separately) and whether you are eligible to make a full deduction on your IRA contributions.

Traditional IRA Deductibility Limits for 2008

* If you and your spouse did not live together for any time period during the year, then you are considered 'single' for tax filing purposes and should use the first option of Single or head of household.

** If you and your spouse did not live together at any time during the year, you are permitted a full deduction.