IRA Contributions: It's a Matter of Income

If you want to get the New Year off to a good financial start, consider funding your Individual Retirement Account for the 2012 tax year--and also socking away money for 2013. While the maximum IRA contribution for 2012 is $5,000, it rises to $5,500 in 2013. For both years, you can contribute an additional $1,000 if you're age 50 or older. You have until the April 15 tax-filing deadline to make your 2012 contribution.

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 and covered by a workplace plan, and you're looking to fully fund an IRA for 2012. Your ability to deduct phases out if last year's modified adjusted gross income was between $92,000 and $112,000. 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 $58,000 and $68,000.

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're married and your 2012 income was below $173,000, you can fully fund a Roth. But the amount you can contribute phases out between $173,000 and $183,000. Above that level, you can't contribute to a Roth. Similarly, if you are single or head of household, the 2012 phase-out range is $110,000 to $125,000.

While you're funding your IRA for 2012, also consider contributing for 2013. Thanks to inflation-driven increases in the income thresholds, more people may find they can fund a tax-deductible or Roth IRA for 2013.

For example, if you're married and have a retirement plan at work, the tax deduction for 2013 traditional IRA contributions phases out between $95,000 and $115,000, while the range for singles and heads of household is $59,000 to $69,000.

What about Roth IRA contributions? The 2013 phase-out range for a married couple starts at $178,000 and tops out at $188,000, after which you can't contribute. For those who file as single or head of household, the phase-out range is $112,000 to $127,000.

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