Tax laws are forever changing. You need to stay on top of them to optimize your retirement planning. Let’s review where 2011 Individual Retirement Account (IRA) tax law leaves us.
The three IRA types are the Traditional IRA, the nondeductible IRA and the Roth IRA. Your annual total contribution to any or all will be $5,000 in 2011. Married couples filing jointly can contribute a total of $10,000, even if only one spouse has income. And for ‘catch-up’ contributions, you can contribute an additional $1,000 if you are aged 50 or over.
Deductibility of Traditional IRA Contributions
All of your contribution is deductible if you have no employer-sponsored retirement plan at work. The same is true if both you and your wife do not have a plan at work.
Deductibility phases out if you or your wife (or both) do have a plan at work. The phase-out range depends on your Modified Adjusted Gross Income as shown in this table Your deduction is full below this range and nondeductible above it.
If you are contributing to a non-Roth IRA, you may want to segregate your deductible and nondeductible contributions to a traditional IRA and a nondeductible IRA, respectively, for ease of keeping track of what contributions were and were not deducted.
Of course the Roth IRA contributions are never deductible. So, it is your ability to contribute to one that is limited by your Adjusted Gross Income. The range over which your contribution is phased out to zero is also given in the table below.
The major advantage of an IRA is that your earnings are not taxed yearly. This allows greater growth than conventionally taxed investments. The traditional and non-deductible IRA earnings grow tax-deferred, whereas the Roth IRA earning grows tax free.
For traditional IRAs, both your deductible contributions and their earnings are taxed as ordinary income. Only earnings are taxed on any non-deductible IRA contributions you make.
Roth IRA earnings or contributions are never taxed on withdrawal … but beware of early withdrawals made before you turn 59½. Those will be taxed and subject to a 10% penalty.