Traditional IRA Contributions – The Rules You Must Know

If you make traditional IRA contributions, there are a few rules and limits you need to know about. (Read IRA FAQ for more information.)

This is important. Your IRA is your best way to save for retirement, so let’s get to work.

Who can make contributions?

If you have earned income (not just passive retirement income), you can contribute to a traditional IRA. If you are younger than 50, the maximum amount you can contribute is $5,000. If you are over 50 years old, the maximum amount you can contribute is $6,000. But keep in mind that you can never contribute more than you have earned for the year. So if you earned $3,000, you can only contribute $3,000 to your traditional IRA account. Whatever you can do, you should do. Slow and steady wins the race, and even tiny contributions add up and are a great way to start saving for retirement.

Is all of the money I contribute to a traditional IRA deductible?

Maybe. If you aren’t covered by a plan at work, then the entire amount is deductible. But if you (or your spouse if you are married) have an employer that offers a retirement plan like a 403b or 401k, your contributions may not be deductible. If you are single and have a plan offered at work, the deduction phases out for single filers: $55,000 to $66,000. If you are married and file jointly, the deductible contribution phases out between $89,000 to $109,000. (TIP – Deductible or not, the money grows tax-free, so max out. And once you do, make sure you make smart retirement asset allocations for your investments in the plan.)

What is the deadline to make traditional IRA contributions?

You can (and should) make your contributions on January 1 for that year. So if you want to make a $5,000 contribution for 2011, you can do so on January 1. This way your money starts working as soon as possible and starts racking up tax-deferred growth.

The deadline for contributions is the following 15th of April. Using the example above, the last date you could contribute to your IRA for 2011 would be 4/15/2012 unless you are filing for a tax extension.

What if your contributions exceed the maximum?

If you find that you’ve contributed too much to your IRA, contact your custodian and get the excess removed. If you don’t, you’ll get slapped with a 6% penalty for each year the excess remains in the account.

How long can you make contributions?

Once you turn 70 1/2, that’s it. You can’t contribute to a traditional IRA account anymore. Time to kick back and enjoy your money, my friend.

The only way you can make contributions to a retirement account after 70 1/2 is if you work for a company that offers a retirement plan. I don’t know why people who work for larger companies have that option and us poor working slobs don’t, but that’s the way it is.