IRA Contributions
For 2008, the maximum that an individual can contribute to a traditional individual retirement account (IRA) is $5,000 for 2008 and 2009 ($4,000 for 2006 and 2007). For those who are age 50 and over, an additional catch-up contribution of $1,000 is allowed. The maximum contribution amounts are summarized as follows:
| Maximum IRA Contributions |
| Tax Year |
Contribution Limit if Under Age 50 |
Contribution Limit if Age 50 or Over |
| 2006 |
$4,000 |
$5,000 |
| 2007 |
$4,000 |
$5,000 |
| 2008 |
$5,000 |
$6,000 |
| 2009 |
$5,000 |
$6,000 |
As previously mentioned, you must have compensation to make an IRA contribution. At the same time, your maximum IRA contribution limit will be reduced to the extent it falls below the overall contribution limit for the year.
 |
Example
Hardy Boy is an industrious 19 year-old college student who earns $2,000 in 2009. The most he can contribute to his IRA in 2009 is $2,000, even though the limit for the year is $5,000 and he has the funds to make up the difference. His IRA contribution for the year is limited because his level of compensation is lower than the maximum contribution limit for 2009.
|
|
Contributions to a traditional IRA can be made for a year at any time during the year or by the due date for filing the year's tax return (usually April 15 the following year). Filing extensions are not counted.
 |
Did You Know?
Under the Heroes Earned Retirement Opportunities (HERO) Act, enacted in 2006, members of the armed forces serving in Iraq, Afghanistan and other combat-designated localities can count their tax-free combat pay as earned income for determining the contribution amount for traditional and Roth IRAs. Prior to this change, a military member whose earnings consisted only of tax-free combat pay was barred from contributing to either IRA.
Under the HERO Act, an eligible taxpayer may make an additional contribution to his or her retirement savings plan that is attributable to the combat zone compensation within three years of enactment. A taxpayer may file an amended return within one year of making such additional contribution to claim a credit or refund resulting form the additional deduction.
In addition, the HERO Act allows military personnel to retroactively make an IRA contribution for 2004 and 2005 if, taking combat pay into account, they qualify for making the contribution. These retroactive contributions can be made as late as May 28, 2009. In addition, retroactive contributions may qualify military personnel for tax refunds for 2004 and 2005. The contribution limits for taxpayers under 50 to either a traditional or Roth IRA were $3,000 for 2004, $4,000 for 2005, and $4,000 for 2006. For those taxpayers over 50, the contribution amounts increased to $3,500 for 2004, $4,500 for 2005 and $5,000 for 2006.
|
|
Starting in 2007 and through 2009, the Pension Protection Act of 2006 allows eligible individuals who are affected by an employer's bankruptcy to make additional contributions to an IRA of up to $3,000. To be eligible to make additional contributions to an IRA:
An individual must have been a participant in an employer's 401(k) plan under which the employer matched at least 50 percent of the employee's contributions with the employer's stock;
The employer must have been a debtor in bankruptcy in a preceding tax year;
The employer or any other person must have been subject to an indictment or conviction in a preceding tax year resulting from business transactions related to the bankruptcy case; and
The individual must have been a participant in the employer's 401(k) plan on the date six months before the bankruptcy case was filed.
Taxpayers who elect to make additional contributions to an IRA under this provision cannot make catch-up contributions to an IRA that may otherwise be allowed for taxpayers aged 50 and older.
 |
Planning Tools
Your IRA sponsor will send you IRS Form 5498 (or a similar statement) telling you what your contribution was for the year. If you report the contribution differently from the sponsor, you are likely to get a letter from the IRS about the discrepancy. You can download Form 5498 to aid in your financial planning.
|
|
If an amount is contributed between January 1 and April 15, the IRA custodian must be told which year (current or previous) the contribution is for. If the sponsor isn't informed, it can assume it is a contribution for the year received and report it as such to the IRS.
 |
Work Smart
Having a higher IRA contribution limit and being able to take advantage of it are two different matters. Many low- and middle-income taxpayers will just not have the funds available to make a lump-sum contribution of this size.
There are a number of options to get around this predicament. One solution is to have IRA contributions set up through payroll deductions or direct withdrawals from a bank account throughout the year.
A more creative solution is to have Uncle Sam finance your IRA contribution through a tax refund. You have to do the math on this, but you can claim a tax deduction for the contribution on a tax return you file early (say January), wait for the refund check, and then deposit the contribution by the due date of your return (i.e. April 15). As long as you deposit the funds by then, the transaction will be kosher as far as the IRS is concerned.
Also, when figuring out your taxes, don't forget to factor in the tax credit for retirement savings contributions for taxpayers with adjusted gross income of less than $26,500 in 2008 or $27,750 in 2009 if single, or $53,000 in 2008 or $55,500 in 2009 if married and filing jointly.
|
|
Change of heart. If you made IRA contributions, but change your mind, you can still withdraw them tax-free if you do so by the due date of your return for the year the contribution is made. If you have an extension to file your return, you can withdraw them by the due date of the extension. After that, it's too late. The only additional requirements are that you cannot have taken a deduction for the contribution and you also withdraw any interest earned (though you can also take into account any associated loss as well).
 |
Tip
If the trustee of your IRA does not know how to calculate the amount you must withdraw (which is worrisome in and of itself), have them consult IRS Notice 2000-39, which explains the IRS-approved method of calculating the withdrawal amount.
|
|
|
|
