Every year the IRS updates Publication 590, a document on Individual Retirement Arrangements (IRAs). Two of the key components of the document that you want to look at are the contribution limits and the income phase outs. These two things enable you to make your financial plans and goals for the next year.
Just in case you don’t feel like reading through pub 590 (and I can’t blame you, the IRS is very good at dragging out documents), I will summarize the key takeaways from the document.
2010 Contribution Limits
The contribution limits are very straight forward and are the same as last year.
| 49 and Younger | 50 and Older | |
| Traditional IRA | $5,000 | $6,000 |
| Roth IRA | $5,000 | $6,000 |
The above table shows that people under the age of 50 are allowed a maximum contribution of $5,000. People 50 and older are allowed an additional $1,000, also known as a “catch up contribution,” which brings their total to $6,000.
The contribution limits are per year per person, not per year per person per IRA type. Put in another way, if you are 30 years old you can not contribute $5,000 to a Traditional IRA and $5,000 to a Roth IRA. You can only contribute a combination that equals $5,000 total.
2010 Roth IRA Income Phase-outs
The above contribution limits are not effective for everyone. They are used as a general rule. But as always, there are exceptions. These exceptions focus around income limits and filing status for the most part.
The income phase-outs are only applicable to Roth IRAs. Traditional IRAs do not have income limits. However, they do have income thresholds in which you are no longer able to contribute tax free dollars, which I will go over later.
Single, Head of Household, or Married Filing Separately (And Didn’t Live With Your Spouse)
If you’re single, head of household, or married and filing separately (and did not live with your spouse for ANY part of the year), you can contribute a maximum of…
- $5,000 if you’re under 50 and your earned income is $105,000 or less
- $6,000 if you’re over 50 and your earned income is $105,000 or less
- $0 regardless of age if your earned income is $120,000 or more
If your earned income is somewhere between $105,001 and $120,000, your 2010 Roth IRA contribution limit phases out based on a percentage basis.
Married Filing Jointly
If you’re married and filing a joint tax return, you can contribute a maximum of…
- $5,000 if you’re under 50 and your combined earned income is $167,000 or less
- $6,000 if you’re over 50 and your combined earned income is $167,000 or less
- $0 regardless of age if your combined earned income is more than $176,000
If your earned income is somewhere between $167,001 and $176,000, your 2010 Roth IRA contribution limit phases out based on a percentage basis.
Married Filing Separately (And Lived With Your Spouse)
If you’re married filing separately (and lived with your spouse for ANY part of the year), you can contribute a maximum of…
- $5,000 if you’re under 50 and your earned income is $0
- $6,000 if you’re over 50 and your earned income is $0
- $0 regardless of age if your earned income is $10,000 or more
If your earned income is somewhere between $1 and $10,000, your 2010 Roth IRA contribution limit phases out based on a percentage basis.
2010 Traditional IRA Income Phase-Out
As mentioned above, there is no income limit to contribute money into your Traditional IRA. However, there is an income limit if you would like to do so while making it tax deductible. The phase out threshold starts at 55,000 for single filers and 89,000 for married filing jointly filers. The upper brackets that determine when the filer can no longer deduct contributions are 65,000 and 109,000 respectively.
Any income between the lower limit and upper limit is figured out on a percentage basis.
2010 Roth IRA Conversions
If you are ineligible for a Roth IRA because of your income, you may be glad to find out that the income limits were removed for a Roth IRA conversion.
How could this come in handy? Let’s say you make too much money to contribute to a Roth IRA. You can make non tax deductible contributions to your Traditional IRA and then convert them to a Roth IRA at the end of the year. However, there are some tricky tax situations around doing this. You should seek a tax professionals input as you may get an unexpected tax bill if you do it wrong (which will be easy to do if you have both tax deductible contributions and non tax deductible contributions to a Traditional IRA).
This article in the Baltimore Sun explains what I just went over.
Contribute!
Before we get ahead of ourselves, keep in mind that you have until April 15, 2010 to make your 2009 IRA contributions. You will be able to make your 2010 contributions from January 2010 until April 15, 2011. Obviously there is a little overlap there, so make sure you declare what tax year you are contributing to to avoid any issues.
I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.
October 20th, 2009 at 7:50 am |
Morning MLR – Thnx for the info. Pls share with me your thoughts on whether you think it’s right that anybody making above $105-120,000 a year is legally not allowed to contribute to their IRA retirement plan.
Where did they come up with this $105-120,000 figure cut off anyway? Why not make it $250,000 for households, since that’s the cut off for where the government deems folks to be rich?
Best
Financial Samurai´s last blog ..Get An Umbrella Insurance Policy – Your Teenager Is Going To Bankrupt You
[Reply]
MyLifeROI Reply:
October 23rd, 2009 at 2:04 pm |
@Financial Samurai,
My thoughts? They can contribute to a traditional IRA, just without the tax benefits. There are Roth IRA conversions to look at if you want it in a roth. Once people get into that bracket they are taking advantage of other tax advantages like the low cap gains tax rate, anyways. Can’t get every advantage, can ya? ;)
I don’t make policy, though, so I’m not sure nor does it really bother me that much. I don’t mind paying taxes because I live in one of the best countries in the world and I have been afforded so many great opportunities because of the tax dollars of my parents generation.
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October 20th, 2009 at 8:13 am |
Great write-up. Quick addition: The income limits depend upon whether you (or your spouse) are covered by a retirement plan at work.
Mike Piper´s last blog ..The Best (Lowest-Cost) ETFs to Buy & Hold
[Reply]
MyLifeROI Reply:
October 23rd, 2009 at 2:06 pm |
@Mike Piper,
Ah, good point. I overlooked that in Pub 590 I guess!
Thanks for the correction, Mike!
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October 22nd, 2009 at 3:51 am |
Very good looking site with a lot of information.I love it.Will revisit it soon.
Cheers
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October 31st, 2009 at 6:43 pm |
Ah, good stuff; thanks for braving Publication 590 so the rest of us don’t have to. ;) It looks as if most of the limits stand where they were for 2009, which makes sense given the lack of inflation this year. It also means I can sock another $5000 away towards my Roth. Yay!
Roger´s last blog ..Weekly Thoughts: Trick or Treat!
[Reply]
MyLifeROI Reply:
November 3rd, 2009 at 11:57 am |
@Roger,
When you look at the past contribution limits, it seems they usually stay at the same limit for 3 years, and then re-adjust up. If this pattern continues, this year is the 3rd year for the current limits.
Your retirement just thanked you, BTW! Keep on chuggin along!
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April 1st, 2010 at 10:49 am |
The IRS really did a “gotcha” on me this year. My income didn’t change (dropped slightly in fact) yet somehow I’m now suddenly making too much to do the same IRA contribution as previous years. Out of the blue. And I didn’t know until I’d already contributed to my IRA. Now I’m stuck with part of my IRA having been deductible and part not. Rolling it over to a Roth (as I now have to do to make future contributions deductible) will be a “joy”.
You say in one of your replies “They can contribute to a traditional IRA, just without the tax benefits.” But the tax benefits are the only reason to contribute to an IRA! Most IRA funds are “AA” rated and thus have relatively low returns, as they’re designed to be failsafe. They are for retirement, after all. And that money is locked away; you can’t touch it without penalty until age 65. So putting $ in an IRA without tax benefits is like sticking that $ under a mattress for 20 years. Sure, it’ll still be there but you got no benefit (returns) from it for those two decades. It’s silly.
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May 2nd, 2010 at 12:22 am |
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