There are several types of IRAs including the traditional IRA (the deductible IRA and deductible spousal IRA), the nondeductible IRA, and the Roth IRA. An IRA can be set up with an insurance company, bank, or investment company.
Traditional IRAs
All earnings on traditional IRAs are tax-deferred, meaning taxes on earnings are not paid until you withdraw your money. You must begin making withdrawals from your IRA by age 70 ½.
- Deductible IRA: If you (or you and your spouse) are employed but not covered by an employer-sponsored retirement plan, you both may contribute up to the maximum each year and deduct your contribution from your taxable income. The 2007 contribution limit is $4,000 for those under age 50 and $5,000 for those age 50 and over. In a one-income family, the unemployed spouse also may contribute to a spousal IRA.
If you (or you and your spouse) are covered by an employer-sponsored retirement plan, you still may be able to make deductible contributions to an IRA based on your modified adjusted gross income (AGI). For single taxpayers the 2007 limit is $52,000, with a partial deduction available for modified AGIs of up to $60,000. For married couples the combined modified AGI limit for tax-deductible contributions is $60,000; a partial deduction can be taken for modified AGIs up to $70,000.
- Deductible Spousal IRA: Married couples with one employed spouse may each contribute up to $3,000 (or $3,500 if age 50 or older) to an IRA as long as the employed spouse earns at least as much as their combined contributions.
If you work, but only your spouse is covered by an employer-sponsored retirement plan, you may qualify for a full IRA tax deduction if your joint modified AGI is below $150,000. A partial deduction applies for a joint modified AGI between $156,000 and $160,000.
Taxpayers who exceed the income limits for the deductible IRA (and the Roth IRA, discussed next) can contribute up to $4,000 (or $5,000 if age 50 or older) to a nondeductible IRA. While contributions cannot be deducted from income for tax purposes, earnings are not taxed until they are withdrawn.
Roth IRAs allow people within certain income levels to make non-deductible contributions. Your earnings will not be taxed at the time you withdraw your funds if they are held for at least five years and you are age 59 ½ or older when the money is withdrawn. (Unlike traditional IRAs, distributions do not have to begin at age 70 ½.)
With a Roth IRA, if you are single or head of household you may contribute $4,000 ($5,000 if over age 50) if your income does not exceed $95,000 (a partial contribution is available for incomes up to $110,000). If you are married with a combined income up to $150,000, you are eligible to contribute to a Roth IRA (married couples may make a partial contribution with a combined income up to $160,000). Note: your contributions to a traditional IRA will reduce the amount that you may contribute to a Roth IRA.