CONTRIBUTION LIMITS
The only requirement for opening an IRA is having earned
income - money you get for work you do. Your total annual contribution is limited
to $5,000 in 2010, whether you put it all in one account or divide it between a
traditional IRA and a Roth. Any amount you earn qualifies, and you can contribute
as much as you want, up to the annual cap. But you can't contribute more than you
earn. For example, if you earn $1,800 in a year, that's how much you can put in.
And whether you earn $5,500 or $350,000, the top limit is the same.
SPOUSAL ACCOUNTS
If your husband or wife doesn't work, but you do, you can
contribute up to $5,000 in 2010 to a separate spousal account in your
spouse's name. The advantage for the nonworking partner is being able to
build an individual retirement fund.
WHICH IRA FOR YOU?
If you qualify for the two types of IRAs with income restrictions,
based on your modified adjusted
gross income (AGI), you'll have to choose among a traditional deductible
IRA, a traditional nondeductible IRA, or a Roth IRA.
The traditional deductible IRA has the strictest income limits, and the traditional
nondeductible has none at all. The Roth is in between.
In 2010, for example, you can deduct all of your IRA contribution if you're single,
and your AGI is less than $56,000, even if you have a retirement plan where you work.
You can deduct a gradually decreasing portion as your income gets closer to $66,000
and nothing if it's above $66,000. You can always deduct the full amount of your
contribution if you're not covered by a retirement plan at your job.
You're eligible for a full Roth contribution if you're single and your AGI is less
than $105,000. With an AGI between that amount and $120,000, you can put a gradually
declining portion of your contribution into a Roth and the balance into a
traditional IRA if you wish.
For a married couple filing a joint return, the income limits for a deductible
traditional IRA begin at $89,000, and are phased out at $109,000 for 2010. Those
amounts are scheduled to increase over time. Either of you can deduct your
contribution if you have no retirement plan of your own at work. But if your spouse
has a plan, the amount you can deduct is reduced gradually if your joint income is
over $167,000,and eliminated if it's over $177,000. Each of you qualifies to
contribute the full $5,000 to a Roth IRA if your joint AGI is $166,000 or less,
phased out up to $177,000.
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CATCHING UP
If you're 50 or older, you can make catch-up contributions to your IRA each year.
In 2010, you can add an extra $1,000 a year to your account, on top of the standard contribution cap
for the year. You're eligible whether or not you've contributed the maximum in earlier years.
IT'S YOUR ACCOUNT
It's easy to open an IRA. All you do is fill out a relatively simple application
provided by the financial institution you choose.
IRAs are self directed, which means that you decide how to invest the money, and you're also
responsible for following the rules that govern the accounts. Basically, that means putting in
only the amount you're entitled to each year. You must also report your annual contribution to
the IRS, on your basic return if it's deductible and on Form 8606 if it's not.
You can invest your IRA money in either a
fixed annuity or
variable annuity. You can move money among the separate account funds within your
IRA without owing income tax on any gains. But there may be a limit on the number of exchanges
you can make without a fee, and there may also be a charge for moving money out of a fixed
annuity or a fixed account within your variable annuity.
WHEN TO CONTRIBUTE
You have until April 15 - the day tax returns are due - to
open an IRA and make the deposit for the previous tax year.
You can put money into your IRA in a lump sum, or spread your contribution out
over up to 15 months. You may put in the whole amount the first day you can,
January 2 of the tax year you're making the contribution for. Or, if you're
like most people, you're more apt to make the deposit on the last possible day.
The most practical solution may be weekly or monthly contributions through
payroll deductions. There are no guarantees when you invest this way, any more
than there are when you invest a lump sum. You could lose money, especially in
the short term. But if your investments do well, adding to them regularly can
give your IRA value a real boost.
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