IRA Contributions: Know Your (Income) Limits

The extended April 17 tax-filing deadline is fast approaching--and with it the chance to fund an Individual Retirement Account for the 2011 tax year. In both 2011 and 2012, the maximum annual contribution to all IRAs combined is $5,000, or $6,000 if you're age 50 or older.

Contributions to traditional IRAs can be tax-deductible. But if you're covered by a retirement plan at work, your tax deduction may be reduced or even phased out completely, depending on your income.

Let's say you are married filing jointly. Your IRA deduction phases out if your modified adjusted gross income for 2011 was between $90,000 and $110,000. What if you file as single or head of household? If you are covered by a retirement plan at work, the tax deduction phases out between $56,000 and $66,000.

A Roth IRA, meanwhile, won't give you an immediate tax deduction. But unlike a traditional IRA, withdrawing the account's earnings can be tax-free after age 59½ (as long as the account has been open for at least five years) and your ability to contribute isn't affected by participating in an employer's retirement plan.

Still, income limits also come into play with the Roth. For instance, if you are married with income below $169,000, you can fully fund a Roth. But the amount you can contribute phases out between $169,000 and $179,000. Similarly, if you are single or head of household, the 2011 phase-out range is $107,000 to $122,000.

While you're funding your IRA for 2011, also consider contributing for 2012. Thanks to inflation-driven increases in the income thresholds, more people may find they can fund a tax-deductible or Roth IRA for 2012.

For example, if you're married and have a retirement plan at work, the tax deduction for 2012 traditional IRA contributions phases out between $92,000 and $112,000, while the range for singles and heads of household is $58,000 to $68,000.

What about Roth IRA contributions? The 2012 phase-out range for a married couple starts at $173,000 and tops out at $183,000, after which you can't contribute. For those who file as single or head of household, the phase-out range is $110,000 to $125,000.

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