An Individual Retirement Account (IRA) is a tax-friendly retirement savings plan. In a standard IRA, contributions are tax-deductible, but tax must be paid on all withdrawals. In a Roth IRA, designated Roth contributions are included in gross income. However, Roth IRA earnings are non-taxable, providing the conditions of the Roth account are met.
The base contribution levels for both standard and Roth IRAs are the same. In both cases, the maximum amount which may be contributed to an IRA or combination of IRAs per year is the lower of earned income or contribution limit. Although your IRA contribution limit applies to all your IRAs together, those contribution limits are over and above the contribution limits for your 401k. You may hold both an IRA and a 401k at the same time, and contribute the maximum amount to each.
For the 2011 tax year, the IRA contribution limit is $5,000. If you are 50 years of age or older at the end of the tax year, you can add an extra $1,000, for a total of $6,000. If you do not use the full amount of your IRA contribution limit in 2011, the difference does not carry over into 2012.
Income phaseout limit
All IRAs also have a phaseout limit on contributions, which is based upon Modified Adjusted Gross Income (MAGI). For Roth IRAs, the exact phaseout range and limit depends on whether you are single or married, filing jointly. For standard IRAs, the phaseout range and limit also depends on whether you are covered by a work retirement plan. If you earn more than the income limit in 2011, you cannot make a contribution to your IRA this year.
For Roth IRAs, if you are single, the 2011 phaseout applies between $107,000 and $122,000. If you are married, filing jointly, the 2011 phaseout range is between $169,000 and $179,000.
For standard IRAs, if you are covered by a retirement plan at work and you are single, the 2011 phaseout applies between $56,000 and $66,000. If you are married, filing jointly, and are covered by a work retirement plan, the phaseout applies between $90,000 and $109,000. If you are not covered by a retirement plan at work and you are married, filing jointly, the phaseout applies between $169,000 and $179,000. The phaseout does not apply if you are single and not covered by a retirement plan at work.