Navigating IRA Contribution Limits

april15Are you wondering if you can make a contribution to your IRA to help save on taxes? Not every one is eligible to deduct an IRA contribution on their return and the rules concerning IRA contribution limits can be confusing, so here’s some guidance.

First, the overall limit for a contribution to a traditional (deductible) IRA in 2013 and 2014 is $5,500 if you are under 50 years old, or $6,500 if you are 50 years or over.

Second, you must have “earned income” in an amount equal to or greater than the amount you wish to contribute.  Earned income includes W-2 income, income from self-employment, alimony and separate maintenance payments received under a divorce decree or separate maintenance, and combat zone compensation that is excluded from income. It does not include K-1 pass-through income from your corporation, even if you own 100% of the business. In other words, the contribution to the IRA is limited to the lesser of your earned income or the $5,500/$6,500 limit discussed above.  If you don’t work, and your spouse does, you can contribute to your own IRA under the spousal IRA provision.

The last limitation is based on your overall income and whether you participate in a retirement plan at your employer. Income includes income from all sources, including wages, self-employment, interest income, income from investments, rental income, pension income and anything else that is taxable income.

Various limits come into play depending on filing status. If you are an active participant in your employer’s plan, your contribution becomes limited when your income exceeds $95,000 (MFJ), or $59,000 for single filers. There is no deduction allowed if you are married filing separately and your income exceeds $10,000.  All amounts are for 2013 and are adjusted annually by the IRS for inflation. The deduction quickly becomes phased out at income levels above this, and is completely eliminated when your income exceeds $115,000 for married filing joint taxpayers and $69,000 for single taxpayers.

If you are not an active participant, but you are married and your spouse is, your deductible contribution becomes limited when your modified adjusted gross income exceeds $178,000 in 2013. It is completely phased out when your income exceeds $188,000.  There is no deduction allowed if you are married filing separately and your income exceeds $10,000.

These income limitations do not prevent you from making the contribution, they just prevent you from deducting the contribution on your tax return. If that happens, you may want to consider contributing to a Roth IRA instead. However, there are income limitations for Roth IRAs as well, but there are also strategies to get around those income limits that we can discuss with you.

The deadline for contributions for 2013 is April 15, 2014.