General Limit
For 2010 and 2011, the most that an individual can contribute to a traditional IRA or Roth IRA generally is the smaller of:
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$5,000 ($6,000 if the individual is age 50 or older), or
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the individual’s taxable compensation for the year
This is the most that can be contributed regardless of whether the contributions are to one or more traditional or Roth IRAs or whether all or part of the contributions are nondeductible. However, other factors may limit or eliminate the ability to contribute to an IRA as follows:
Age 70½ rule. An individual who is age 70½ or older cannot make regular contributions to a traditional IRA for the year.
Limit if Covered by Employer Plan. The deduction an individual can take for contributions made to his or her traditional IRA depends on whether the individual and his or her spouse was covered for any part of the year by an employer retirement plan. The deduction is also affected by how much income the individual had, by his or her filing status and by social security benefits the individual received.
The deduction begins to decrease (phase out) when the individual’s income rises above a certain amount and is eliminated altogether when it reaches a higher amount. These amounts vary depending on the individual’s filing status.
Individuals can determine if their deduction is subject to the phase-out, by determining their modified adjusted gross income (AGI) and filing status, as explained in Pub 590. Once he or she has determined his or her modified AGI and filing status, the individual can use the Tables in Pub 590 to determine if the phase-out applies.
Spousal IRA Limit. For 2010 and 2011, if an individual files a joint return and has compensation less than his or her spouse, the most that he or she can contribute to an IRA for the year is the smaller of:
1. $5,000 ($6,000 if age 50 or older), or
2. Both spouses’ total compensation includible in gross income for the year, reduced by:
a. The spouse's IRA contribution for the year to a traditional IRA.
b. Any contributions for the spouse’s Roth IRA for the year.
Qualified reservist repayments are not subject to the general limit.
Examples.
George, who is 34 years old, earns $24,000 in 2010 or 2011. His IRA contributions for 2010 and 2011 are limited to $5,000.
Danny, an unmarried college student working part-time, earns $3,500 in 2010 or 2011. His IRA contributions for 2010 and 2011 are limited to $3,500, the amount of his compensation.
John, 42, has both a traditional IRA and a Roth IRA and can only contribute a total of $5,000 to either one or both.
Roth IRA Contribution Limit. An individual’s contribution amount to a Roth IRA might be reduced depending on his or her modified adjusted gross income.
Excess IRA Contributions. Generally, an excess IRA contribution is the amount contributed to an individual’s traditional IRA and Roth IRA for the year that is more than the above limits.
Regular (not rollover) contributions made in the year a person is age 70½ and any later year are also excess contributions unless made to a Roth IRA.
An excess contribution could be the result of an individual’s contribution, his or her employer's contribution or an improper rollover contribution.
Tax on Excess Contributions. In general, if excess IRA contributions are not withdrawn by an individual’s income tax return due date (including extensions), then the individual is subject to a 6% tax. The individual must pay the 6% tax each year on excess amounts that remain in his or her traditional or Roth IRA at the end of his or her tax year. The tax cannot be more than 6% of the combined value of all the IRAs as of the end of the tax year.
Excess Contributions Withdrawn by Due Date of Return. An individual will not have to pay the 6% tax if he or she withdraws an excess contribution made during the year with any income earned on that excess contribution by his or her income tax return due date, including extensions.
Excess Contributions Withdrawn After Due Date of Return. An individual must pay the 6% tax if he or she withdraws an excess IRA contribution after his or her income tax return due date. In general, individuals must include all distributions (withdrawals) from their traditional IRA in their gross income. However, see Pub 590 for certain conditions, that if met, allow individuals to withdraw excess IRA contributions and not include them in their gross income.
The withdrawal can take place at any time, even after the due date, including extensions, for filing the tax return for the year.
Additional Resources: from the IRS Publication 590, Individual Retirement Arrangements
Disclosurer: Please understand that the above data is from the IRS and therefore subject to changes, updates and limitations that you should always contact your tax advisor for updated materials. This is being furnished to you as a service.
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