- There are two primary types of individual retirement accounts, including traditional IRAs and Roth IRAs. These two types of accounts have some similarities, but also some significant differences. While both types of accounts provide certain tax advantages, Federal tax laws and IRS regulations only allow you to deduct contributions made to a traditional IRA. Contributions made to a Roth IRA are not tax deductible and must be made with after-tax dollars.
- Anyone who is under 70 1/2 years of age and who has earned income can contribute to a traditional IRA. If you are married and you file a joint income tax return, both you and your wife can have and contribute to separate traditional IRAs, even if only one of you has earned income. You can open a traditional IRA at any time during the year, and take a deduction for contributions made up until the time you file your federal income tax return, but no later than the due date, which is typically April 15 for the previous tax year. You can contribute to your IRA regardless of whether you are covered by a pension plan at work, although there may be some restrictions on your tax deductions.
- The deductible portion of your traditional IRA may be affected by your income if you or your spouse is covered by a pension plan at work. If you filed as single and your adjusted gross income exceeded $56,000, your deduction will be reduced or eliminated. If you were married and filed a joint return, your deduction would be reduced if your adjusted gross income exceeded $89,000. If you were married and filed a separate return, you would not be able to take a deduction if your adjusted gross income was $10,000 or more.
- The IRS does not stipulate a difference between employees who were covered by a pension plan for the entire year or a part of the year. The IRS considers you to have been covered by a pension plan if either you or your employer contributed to your account at any time during the year. The IRS considers you to have been covered by a pension plan if you are eligible to contribute to a 401(k), even if you do not contribute to it. If you meet the age and service requirements to participate in a pension plan offered by your employer, the IRS considers you covered by that plan, whether or not your have worked long enough to become vested in the plan. The IRS notes that employers typically check the Retirement Plan box on your W-2 to indicate that you were covered by a pension plan.
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