IRA Eligibility Rules: Can You Contribute?

Determining your IRA eligibility is an important part of your retirement planning. IRAs can be valuable tools, but if you do not qualify to contribute to a particular IRA, then it will, of course, do you no good. Here are the basics of IRA eligibility and how to determine whether you qualify. 

Types of IRAs

There are two basic types of IRAs to which you could contribute: a traditional IRA and a Roth IRA. Each kind has its benefits and drawbacks.

A traditional IRA allows you to make tax-deductible contributions to a retirement account. The money can be invested and is allowed to grow tax-free. When you reach 59 1/2, you can start to withdraw money from the account. At that point, you will pay taxes on the money at whatever tax bracket you are in.

By contrast, you contribute to a Roth IRA with after-tax dollars, and then the money grows tax free. Once you get to age 59 1/2, you can take out the money and do not have to pay taxes on it. 

Income Restrictions

When trying to decide which type of IRA to get, you will want to look at their income restrictions. A traditional IRA has no income restrictions. Therefore, regardless of how much money you make, you can get a traditional IRA and contribute to it. 

A Roth IRA, however, has some income restrictions. The government does not want people who are already wealthy to be able to avoid paying taxes down the road. (The following figures are from rules current in early 2010.)

If you are single, you have to make less than $105,000 in order to fully contribute to a Roth IRA. If you make between $105,000 and $120,000, you are in the phase-out income bracket. This means that you will not be able to make a full contribution to a Roth IRA, but you can still contribute a partial amount. 

If you are married and file your taxes jointly, you have to make less than $166,000 in order to contribute fully. If you make between $166,000 and $176,000, then you fall into the phase-out category. You can make a partial contribution. 

If you make more than $120,000 individually or $176,000 jointly, you are ineligible for a Roth IRA. In that case, you could open only a traditional IRA.

Contribution Limits

In addition to income restrictions, IRAs also have yearly contribution limits. This means that once you reach that particular limit, you would not be eligible to contribute any more money to the account. If you are under the age of 50, you can contribute up to $5000 per year towards either type of IRA. If you are over 50, you can put as much as $6000 in your IRA. Once you reach those thresholds, you are ineligible to contribute any more money. 

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