IRA and Roth IRA

Traditional IRAs (Tax Deductible Contributions)

If you have taxable compensation (wages, self-employment income) and not over 70 1/2 years old, you can set-up and make contributions to a traditional IRA. You can have a traditional IRA even if you are covered by your employer’s retirement plan However, the amount that is deductible may be limited, or phased out.

Contributions to IRA’s are limited to the lesser of:

The participant’s compensation (or a spouse’s compensation under a spousal IRA), or

Statutory limits of $5,000, or $6,000 if 50 years of age or older

Contributions must be made by April 15th of the year after the taxable year. You can’t delay the contribution past April 15th, just because you are filing a tax return extension.

You can’t use an IRA as security for a loan. However, this does not mean you can’t report your IRA on a loan request form as one of your assets.

Spousal IRA -If you are filing a married filing jointly tax return, a spouse can use the compensation of the other spouse to qualify. Thus, a spouse who has no income, can make an IRA contribution, as long as the other spouse’s income exceeds the amount of the combined IRA contributions.

Reduced or Phased Out IRA Contributions

If you are an active participant in your employers retirement plan, or 401(K) plan, your tax deduction for an IRA contribution may be reduced or phased out. When your MAGI (Modified adjusted gross income) is between $89,000 and $109,000 (2009), your contribution will be reduced. Thus if your income exceeds $109,000 (and you are in a plan at work), then your IRA deduction is zero.

If you are not an active participant, but your spouse is, the non-active participant’s deduction is phased out when MAGI is between $166,000 and $176,000, and is thus zero when over $176,000.


A Roth IRA is subject to the same rules as a traditional IRA except for a few items. For example, contributions are NOT tax deductible. Thus, active participation at work is irrelevant. If certain requirements are met, then distributions are tax-free. Further, contributions can be made after you reach age 70 1/2.  Required minimum distribution rules do not apply, and thus distributions are not required, until death.

Contributions do phase out when MAGI (defined above) is $159,000 to $169,000 and thus zero if over $169,000. (Married Filing Joint status)Taxation of Roth IRA withdrawals can be a bit complicated. Generally, distributions are tax-free and penalty free until total distributions exceed contributions. Taxation of earnings depends on other factors, such as they are tax-free if the Roth has been held for 5 years, and is due to being over 59  1/2  years of age, death or a qualified first-time home buyer.

Any nonqualified distribution would be taxable, but not subject to the 10% early withdrawal penalty.

Conversions of an IRA to a ROTH

Money in your IRA can be converted to a Roth IRA, if MAGI is under $100,000, and you are not filing MFS. A conversion is considered a distribution and thus it is taxable. The income from the conversion is based on the value of the amount of the IRA being converted.

Beginning in 2010, the $100,000 MAGI limitation no longer applies and thus taxpayers of any income level can convert an IRA to a Roth IRA.

While the Roth IRA has many positive attributes, the concept of paying tax now, and having an asset depleted in value substantially now is a hard pill to swallow. Further, upon retirement you will likely be in a lower tax bracket than you are now, and thus deferring or pushing off the tax to some later date may make more sense. However, of course you need to do the homework.