2010 IRA Contributions and Deductions

Tax laws are forever changing. You need to stay on top of them to optimize your retirement planning. Let’s review where 2010 Individual Retirement Account (IRA) tax law leaves us.

IRA Contributions

The three IRA types are the Traditional IRA, the nondeductible IRA and the Roth IRA (see second page). Your annual total contribution to any or all of them is $5,000 in 2010. Married couples filing jointly can contribute a total of $10,000, even if only one spouse has income. And for catch-up contributions, you can contribute an additional $1,000 if you are aged 50 or over. After 2010, contributions will be adjusted for inflation.

Deductibility of Traditional IRA Contributions

All of your contribution is deductible if neither spouse has an employer-sponsored retirement plan at work.

Deductibility phases out if you or your wife (or both) do have a plan at work. The phase-out range depends on your Modified Adjusted Gross Income as shown in the table below. Your deduction is full below this range and nondeductible above it.

If you are contributing to a non-Roth IRA, you may want to segregate your deductible and nondeductible contributions to a traditional IRA and a nondeductible IRA, respectively, for ease of keeping track of what contributions were and were not deducted.

Roth IRA

Of course the Roth IRA contributions are never deductible. So, it is your ability to contribute to one that is limited by your Adjusted Gross Income. The range over which your contribution is phased out to zero is also given in the table below.

Earnings

The major advantage of an IRA is that your earnings are not taxed yearly. This allows greater growth than conventionally taxed investments. The traditional and non-deductible IRA earnings grow tax-deferred, whereas the Roth IRA earning grows tax free.

Withdrawals

For traditional IRAs, both your deductible contributions and their earnings are taxed as ordinary income. Only earnings are taxed on any non-deductible IRA contributions you make.

Roth IRA earnings or contributions are never taxed on withdrawal … but beware of early withdrawals made before you turn 59½. Those will be taxed and subject to a 10% penalty.

IRA type	Who’s eligible to contribute in 2010?	Annual contribution for 2010	Withdrawals
Deductible IRA(traditional)	If spouses’ employers have a employer-sponsored retirement plan then deduction phases out for: Individuals with modified adjusted gross income (MAGI) between $56,001 and $66,000. Married couples between $89,001 and $109,000. Married filing separately: $0 - $10,000. If only one spouse participates in an employer-sponsored plan, deduction phases out: Between MAGI of $167,001 and $177,00 for uncovered spouse, between $89,001 and $109,000 for covered spouse. If single or either of married couple cannot participate in plan: No income restriction for IRA deduction.	$5,000 ($6,000 if you are age 50 or older at year-end)	Withdrawals are taxed as ordinary income. Penalty-free withdrawals permitted before age 59 ½ for first-time home purchase up to $10,000, higher education expenses or in event of disability or death. Must begin withdrawals at 70½ with minimum required distribution
Nondeductible IRA	Everyone who has earned income.	As above	As above
Roth IRA	Eligibility to contribute phases out between MAGI of $105,000 and $120,000 for singles, and $167,000 and $177,000 for married couples. Married filing single’s range is $0 to $10,000	As above	Withdrawals are tax-free and penalty-free after five years if you are 59½, or in the following circumstances: death, disability or for first-time home purchase up to $10,000. Penalty-free, but not tax-free withdrawals permitted before age 59 ½, for higher education expenses. No minimum withdrawal at any age.

Articles wrriten and provided by Javelin Marketing.

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[1] Information comes from IRS www.irs.gov