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What requirements must I meet to be eligible to make a contribution to a Traditional IRA?

To be eligible to make a regular contribution to a Traditional IRA, you must be under age 70½ (during the entire tax year for which you wish to contribute), and have earned income.

What types of income qualify as earned income for purposes of making regular contributions to a Traditional or Roth IRA?

As a general rule, you must have earned income from personal services rendered to make a regular contribution to an IRA. IRS Revenue Procedure 91-18 outlines a so-called ’safe harbor’ rule for determining whether income is considered qualifying earned income for purposes of making a Traditional IRA contribution. Revenue Procedure 91-18 stipulates that any amount shown in the ‘Wages, tips, other compensation’ box on the Form W-2, Wage and Tax Statement, minus any amount shown in the ‘nonqualified plans’ box will be considered eligible compensation for Traditional IRA contributions regardless of whether it constitutes true earned income. In addition, IRS Publication 590, Individual Retirement Arrangements (IRAs), states that taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance are considered eligible compensation for funding a Traditional or Roth IRA.

Does investment income qualify as earned income for purposes of making regular contributions to a Traditional or Roth IRA?

As a general rule, investment income does not qualify as earned income for purposes of making contributions to a Traditional or Roth IRA.

If I’m self-employed and have more than one business, how do I determine if I have earned income for purposes of making a contribution to a Traditional or Roth IRA?

If you operate more than one unincorporated business, you must look at your aggregate self-employment income to determine your amount of earned income for purposes of making a regular contribution to a Traditional or Roth IRA. For example, if you operate two businesses and business A showed $20,000 of profit for the year while business B showed a $20,000 loss, you would be considered as having zero earned income for purposes of making a Traditional or Roth IRA contribution.

If I am covered by a retirement plan at work, am I ineligible to make a contribution to a Traditional IRA?

Anyone who is under age 70½ and has earned income may make a Traditional IRA contribution. Participation in a retirement plan through work does not affect your eligibility to make a regular contribution to a Traditional IRA. However, being considered an ‘active participant’ in an employer-sponsored retirement plan may affect the deductibility of your Traditional IRA contribution. Whether your tax deduction for your Traditional IRA contribution is affected by participation in a retirement plan through work will depend on your modified adjusted gross income (MAGI) and tax filing status.

How does being an active participant in an employer-sponsored retirement plan potentially affect my ability to make a tax-deductible contribution to a Traditional IRA?

If either you or your spouse is considered an active participant in an employer-sponsored retirement plan, your ability to make tax-deductible contributions to a Traditional IRA will depend on your modified adjusted gross income (MAGI). Below certain MAGI levels, you can still make a fully deductible Traditional IRA contribution. However, if your MAGI is above these applicable thresholds, you will only qualify for a partial deduction or no deduction depending on whether your MAGI is within or above the deduction phase-out range.

The following chart highlights the deductibility phase-out ranges for Traditional IRAs from 1998 through 2007.

1998 - 2007 IRA Deductibility Phase-out Ranges For Active Participants

Tax Year Single Filer MAGI Married, Filing a Joint Tax Return
1998 $30,000 - $40,000 $50,000 - $60,000
1999 $31,000 - $41,000 $51,000 - $61,000
2000 $32,000 - $42,000 $52,000 - $62,000
2001 $33,000 - $43,000 $53,000 - $63,000
2002 $34,000 - $44,000 $54,000 - $64,000
2003 $40,000 - $50,000 $60,000 - $70,000
2004 $45,000 - $55,000 $65,000 - $75,000
2005 $50,000 - $60,000 $70,000 - $80,000
2006 $50,000 - $60,000 $75,000 - $85,000
2007 $50,000 - $60,000 $80,000 - $100,000

Is my employer required to inform me if I am considered an ‘active participant’ in an employer-sponsored retirement plan?

Yes. Your employer must indicate on your IRS FormW-2, Wage and Tax Statement, if you are considered an active participant in an employer-sponsored retirement plan and, therefore, subject to potential restrictions on tax-deductible contributions to a Traditional IRA.

If I am eligible to participate in a 401(k) plan through work, but choose not to, am I still be considered an ‘active participant’ in an employer-sponsored retirement plan when determining the tax-deductibility of my Traditional IRA contribution?

Provided no contributions or forfeitures are allocated to the plan on your behalf, you will generally not be considered an active participant in your company’s 401(k) plan if you elect not to defer into the plan. IRS Notice 87-16 clearly states that an individual is not considered an active participant in an employer-sponsored retirement plan merely because he or she is eligible to participate in an employer’s 401(k) plan.

If I intend to make nondeductible contributions to a Traditional IRA, do I need to set up a separate IRA for my nondeductible contributions to keep these assets separate from my other pretax Traditional IRA assets?

No. It is unnecessary for you to set up a separate Traditional IRA to receive nondeductible contributions. You must, however, be sure to track and report your nondeductible Traditional IRA contributions using IRS Form 8606, Nondeductible IRAs.

Can I make both deductible and nondeductible contributions to a Traditional IRA for the same tax year?

Yes, however, your aggregate contributions cannot exceed the maximum contribution limit.

What is the deadline for making a regular contribution to a Traditional or Roth IRA?

Assuming you meet the appropriate eligibility criteria for contributing to a Traditional or Roth IRA, you may make regular contributions for the previous tax year up until your tax return due date (not including extensions).

What type of information should I provide when I’m making a contribution to my Traditional or Roth IRA?

Your IRA provider will generally ask you to complete a special IRA contribution form that will capture the information necessary for them to properly process your IRA contribution. At a minimum, you should be sure to identify the type of contribution you are making (e.g., regular or spousal contribution, rollover contribution, etc.) and, if applicable, the tax year for which the contribution is being made.

If I’m self-employed, can I contribute to a Traditional IRA if I’m already contributing to a business retirement plan like a simplified employee pension (SEP) plan?

Yes, provided you are under age 70½ and have eligible earned income, you may contribute to a Traditional IRA in addition to contributing to a SEP plan (or other business retirement plan such as a ‘Keogh’). Note, however, that your ability to take a tax deduction for your Traditional IRA contribution may be affected since you most likely will be considered an ‘active participant’ in an employer-sponsored retirement plan.

If I file my taxes on a fiscal-year basis, what is my deadline for making a regular contribution to a Traditional or Roth IRA?

Under the federal laws governing IRA contributions, you have until the deadline for filing your tax return (not including extensions) to make a Traditional or Roth IRA contribution regardless of whether you file your taxes on a calendar-year basis like most individual taxpayers or on a fiscal-year basis.

Can I make contributions to a Traditional IRA if I am over age 70½?

You may not make regular contributions to a Traditional IRA for the tax year in which you turn age 70½ or any subsequent year. Nonetheless, you are not restricted on making eligible rollover or transfer contributions to a Traditional IRA (from another Traditional IRA or other qualifying plan) provided you do not transfer or roll over any amounts considered to be required minimum distributions.

If I have a certificate of deposit (CD) that is earning a good rate of return and does not mature for several years, may I contribute the CD to my IRA in lieu of cash for my IRA contribution?

No. The federal laws governing IRA contributions stipulate that contributions to IRAs, other than rollover or transfer contributions, must be made in cash. For this purpose, cash means currency, check or money order.

If I am going to make a deductible contribution to my Traditional IRA, is it OK to file my tax return before I make the contribution?

The deadline for making your Traditional IRA contribution is the due date of your federal tax return (not including extensions) regardless of when you physically file your tax return. For example, if you are eligible for a tax refund, it is perfectly permissible to file your return early in the year with the intent of using your tax refund to fund all or part of your Traditional IRA contribution. The only time a problem arises is if you claim an IRA contribution on your tax return and then fail to timely contribute to your IRA on or before the contribution deadline.

What is a spousal IRA contribution?

Generally, an individual must personally have earned income to be eligible to contribute to an IRA. In cases where one spouse does not have earned income (or only a small amount of earned income), however, a spousal IRA contribution can be made on behalf of one spouse based on the earned income of the other spouse. Such IRA contributions are referred to as spousal IRA contributions.

What is the maximum amount that I can contribute to my spouse’s IRA as a spousal IRA contribution?

Spousal IRA contributions are generally limited to the same dollar amount as regular IRA contributions. However, when using the spousal contribution rules, the maximum aggregate amount that may be contributed between two spouses is equal to the earned income of the compensated spouse (i.e., the one upon whose income the IRA contributions are being based).

If I’m self-employed, but did not realize any income from my business this year, am I potentially eligible for a spousal IRA contribution based on my wife’s earned income?

Yes. So long as your wife has sufficient earned income, you and your wife file a joint tax return, and you are under age 70½, you should qualify to make a spousal contribution to your IRA.

If my spouse and I are using the spousal IRA contribution rules to make contributions for both my spouse and I based on my earned income, must we establish two separate IRAs?

Yes. Even though you are taking advantage of the spousal IRA contribution rules, you cannot set up one IRA that both you and your spouse own jointly. You and your spouse must use separate IRAs.

If I am over age 70½ and still working, may I make a contribution to my non-working spouse’s IRA based on my earned income?

Yes, IRS Announcement 88-80 and IRS Publication 590, Individual Retirement Arrangements (IRAs), clarify that a compensated spouse need not be under age 70½ to make a spousal contribution for a non-compensated spouse. Your noncompensated spouse must be under age 70½, however, to be eligible to receive a spousal IRA contribution.

Is there any way to ‘undo’ a regular contribution to a Traditional or Roth IRA?

You have up until your tax return due date (including extensions) to remove any current-year contribution by treating it as an ‘excess’ contribution. After your tax return due date (including extensions), you may only remove true excess contributions. (Note: When removing a contribution prior to your tax return due date by treating it as an ‘excess’ contribution, federal regulations require that you remove the ‘earnings attributable’ which must be included in your taxable income. These rules can be confusing, so make sure you work with a competent tax advisor to make sure you are handling the transaction properly.)

Under what circumstances can I elect to redesignate my Traditional IRA contribution for a subsequent tax year?

Federal laws governing IRA contributions stipulate that you may only redesignate a Traditional IRA contribution for a subsequent tax year in circumstances where your contribution exceeds your maximum contribution limit for the year (regardless of whether the contribution is deductible or nondeductible).

What is the new contribution tax credit, and how does it work?

The ‘Saver’s Credit’ will help a taxpayer offset the cost of the first $2,000 contributed to IRAs and certain other retirement plans. The tax credit is determined as a percentage of the contribution (determined according to income) as shown in this chart. To qualify, a taxpayer must be at least age 18, not a full-time student, and not claimed as a dependent on another person’s tax return. Please see IRS Announcement 2001-106 for complete details.
1998 - 2007 IRA Deductibility Phase-out Ranges For Active Participants

Credit Married, Joint Income Head of House Income Other Income

50% Up to $30,000 Up to $22,500 Up to $15,000
20% $30,001-$32,500 $22,501-$24,375 $15,001-$16,250
10% $32,501-$50,000 $24,376-$37,500 $16,251-$25,000

Is it possible to make a contribution for a previous tax year?

Yes. The deadline to contribute to a Traditional IRA for a particular tax year is generally April 15 of the following year. When this date occurs on a weekend or a legal holiday, the following business day becomes the deadline. Tax return extensions will not affect this deadline. When an individual makes a contribution to his or her IRA between January 1 and April 15 for the previous tax year, this is frequently referred to as a ‘carryback contribution.