Roth IRA

With less than two months to go before 2009, I though it would be worth taking a look at IRA contribution limits for 2009. As of 2008, contribution limits are indexed to inflation and will increase in $500 increments (as necessary). Unfortunately, there’s not much to report here, as the limits are staying the same in 2009 as they were in 2008. What follows is a table of contributions limits starting back in 2002, and running through next year.

The silver lining here is that the cutoffs for making Roth IRA contributions and for deducting Traditional IRA contributions have increased 2009.

Roth IRA Contribution Thresholds

If you’re married and filing jointly, you can make your full Roth IRA contribution as long as your modified adjusted gross income (MAGI) is below $159k, and your ability to contribute phases out entirely at $169k. For single filers, the thresholds are $101k and $116k.

Traditional IRA Deduction Thresholds

If you’re married and filing jointly, you can make deduct your full Traditional IRA contributions as long as your modified adjusted gross income (MAGI) is below $85k, and your ability to deduct contributions phases out entirely at $105k. For single filers, the thresholds are $53k and $63k.

Deadlines for Contributing

Remember, you can make 2008 contributions all the way up to April 15, 2009. As for 2009 contributions, you can start as early as January 2nd, 2009 with a deadline on the back end of April 15, 2010.

IRAs were created to encourage people to save for their retirement, by offering them a significant tax break.
They are intended for ordinary working people - not, for example, the wealthy (income limits prevent them from participating),
or trust fund kids too lazy to get a job (contributions have to be made from salary, not from investments or other income).

The rules for eligibility and contribution limits change every year.
You can (and should) get the official rules from IRS Publication 590;
but to help make things clear, here is a quick and user-friendly (but not official!) summary:

IRA Contribution Limits

To summarize how all of the rules work:

1. If your status is Married Filing Separately you are effectively locked out due to an extremely restrictive limit.
   (The rationale: the government doesn’t want to give you a tax break in case your spouse is high-income.
   The exception: if you and your spouse lived apart for the whole year, you get the same limits [and same bummer lifestyle] as a Single filer.)
2. If your status is anything else, then your contribution limit is (using 2008 numbers):
   

   $5000 if your income is low enough (and $6000 if you’re 50 or older) zero (that is, you can’t contribute at all) if your income is too high a sliding scale somewhere in between, if your income is somewhere in between “low enough” and “too high”

3. In case you have multiple IRAs, the limit is the total you are allowed to contribute to all of them
4. And in all cases, your total contributions can’t be greater than your reported salary income.

If you don’t qualify…

If your income is too high to make a Roth IRA contribution, you may still be eligible for a traditional deductible IRA
if neither you nor your spouse is covered by a retirement plan at work.
See IRS Publication 590.
(Look under “Traditional IRAs”.)

Penalties

A Roth IRA is intended to be a retirement account, so penalties apply if you misuse it by withdrawing funds too early.
As a rule, you should plan not to make any withdrawals until at least age 59½ or five years after you make your first contribution, whichever comes later.
This rule does have exceptions: see
IRS Publication 590
for details. (Search for “Qualified Distributions”.)

A Roth IRA is an Individual Retirement Account that provides tax-free growth. As a result, it’s the simplest - and potentially the most effective - sheltered account imaginable.

The Roth Tax Advantage

The government sets a limit on how much you can contribute to a Roth. That limit is $5,000 in 2008.