Downloadable version (pdf) of this article 

In your life you have probably met someone who said they couldn’t make an IRA contribution because they made too much money.  You may even be that person.

Congratulations and potentially a dose of humility may be in order.  Additionally, unless we’re talking about Roth IRAs, we’re going to need a correction -- regular IRAs are always available for those with earned income. 

What may lead many to think that they can’t make a contribution is the fact that there are significant limits regarding who can deduct an IRA contribution.  The impact of the rules governing these limits is shown on the chart on the next page.  In the meantime, you can keep track of the elements that might keep you from deducting some or all of that contribution by remembering the three basic questions that decide your fate:

1. Do you have a job?
2. Are you married?
3. How much do you make?

I don’t suggest that you get in the habit of asking these questions of others.  The IRS has no shame however, and likes to see actual proof on all these points before it potentially grants a deduction.  Why your marital status, income or employment should factor in on a deduction that, at most, covers $5,000 of income is a good question for your Congressman. 

So, we’re all good on this topic now.  You can always make a contribution to an IRA – you just might not be able to deduct it.

I wish it were that easy but one further, significant point needs to be made: contributions to a Roth IRA are NOT always available.  In the case of the Roth the biggest factor is how much money you make.  If you’re married, filing jointly and make more than $179,000 (combined) this year then congratulations are indeed in order.  Perhaps you should use some of that income to make a nondeductible IRA contribution as you won’t be able to put a dime into a Roth IRA.

IRA Terminology

Traditional IRA

Allows participants to make tax deferred contributions up to $5,000 in 2011 ($6,000 for individuals 50 years or older) meaning you are able to deduct your contributions from your income tax lowering your AGI.  Contributions grow tax deferred.  Withdrawals are taxed as ordinary income according to your tax bracket in the year the distribution occurs.  Early withdrawal penalties may apply.

Roth IRA

Allows participants to make after tax contributions (same contribution limits as Traditional IRA).  You are NOT able to deduct your contributions from your current income taxes.  However, your contributions grow tax free and maybe withdrawn at retirement with no taxes due.  Early withdrawal penalties may apply.

Adjusted Gross Income (AGI)

Adjusted gross income is the figure on which individuals calculate their federal taxes.  It is computed by subtracting deductions, such as certain IRA contributions, from a taxpayer’s gross income.  It is an individual’s or couple’s income before itemized deductions and exclusions.

Covered

Form W-2 from your employer has a box used to indicate whether you were covered for the year. The “Retirement Plan” box should be checked if you were covered. Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered . If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. 

Joint Filing

You and your spouse file a joint tax return.

2011 Contribution Limits

Traditional and Roth IRA $5,000, additional $1,000 catch up for participants 50 years old or older. 

Modified Adjusted Gross Income (MAGI)

To arrive at your modified AGI, start with your adjusted gross income and then add back the following items:

• Any deduction you claimed for a regular contribution to a traditional IRA
• Any deduction you claimed for student loan interest or qualified tuition and related expenses
• Any income you excluded because of the foreign earned income exclusion
• Any exclusion or deduction you claimed for foreign housing
• Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses
• Any employer-paid adoption expense you excluded
• Any amount claimed as domestic production activities deduction

Note that you are not required to add back any contribution you made to an employer plan such as a 401(k) plan.  If you are running up against the limit for modified AGI, one way to reduce that number is to make deductible contributions to an employer plan.

Cobb Retirement Solutions, LLC (CRS) is a Registered Investment Advisor.  This information has been prepared for your general use.  CRS is not the source of this data and therefore cannot warrant its accuracy.  Please note this information is not intended to be tax or legal advice – which CRS does not offer.  Please consult your tax or legal professional for any specific questions you may have.