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You Never "Make Too Much" to Make an IRA Contribution

ed slott making an IRA contributionPlease, please don't make the mistake that so many people make and think you make too much money to make an IRA contribution. There is no limit on how much income you can make in order to make an IRA contribution. None, whatsoever. Yet, each year I speak with countless financial advisors and CPAs who are advising their clients that they cannot make an IRA contribution for the year because their income is too high. That is not true and don't you believe it for one second!

That probably raises two big questions in your mind. First, if there are no income limits on who can contribute to a traditional IRA, what, if any, restrictions are there? Secondly, why are so many “professionals” confused and giving incorrect advice? Let’s address each of these in turn.

Are there any restrictions on contributing to a traditional IRA?
Yes, there most certainly are. For starters, you have to have income to be able to contribute to a traditional IRA, but not just any old income will suffice. Your income has to be from a source that falls into a category of income known as “compensation.” Although there are some more obscure types of “compensation,” such as taxable alimony, for most of you, compensation will either be your W-2 wages or your income from self-employment.

There is also another restriction on making a traditional IRA contribution. If you are 70 ½ or older by the end of the year for which you are trying to make a traditional IRA contribution, you are out of luck. Beginning in the year you turn 70 ½, you can no longer make a traditional IRA contribution (though you may be able to make a Roth IRA contribution).

Those are the only two restrictions to contribute to a traditional IRA. So, to make things easy, if you have compensation, such as earned income, and are younger than 70 ½ at the end of the year for which you are making the contribution, you can make a contribution.

Why are so many people confused about this subject?
I can think of two reasons. One possibility is that while there are no income restrictions on who can contribute to a traditional IRA, there are income restrictions on who can contribute to a Roth IRA.
Another possibility is mixing up the ability to contribute to an IRA with the ability to deduct that contribution. If you (and your spouse, if you are married) are not covered by a company retirement plan, such as a SEP IRA or 401(k), then there is no limit to how much you can make in order to be able to deduct your IRA contribution. If, however, you (or your spouse, if you’re married) are covered by a retirement plan through an employer, then your ability to deduct an IRA contribution could be phased out. You can still make a non-deductible IRA contribution though, and there are many wonderful reasons to do so.

*** Spoiler Alert – stay tuned to the Slott Report. In a future article I will be discussing a very famous person who could have benefited from making an IRA contribution in 2011, but he decided against it***

Article Highlights

  • There is no income limit for a traditional IRA contribution
  • You must have "compensation" to make an IRA contribution
  • You cannot make a traditional IRA contribution for the year in which you turn age 70 1/2 or later


-By Jeff Levine and Jared Trexler

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