2009 is here, which means it’s time to start planning your retirement contributions. Even though 2008 is over and done with, you can still contribute to your 2008 IRA until April 15, 2009. You can contribute to your 2009 IRA any time between January 2, 2009 and April 15, 2010. Just note that if you make IRA contributions between January 2 and April 15th, you may need to specify which tax year you are contributing to.
2009 Traditional and Roth IRA Contribution Limits
The maximum you can invest in a Traditional or Roth IRA for 2008 and 2009 is $5,000 if you are under age 50. Those who are age 50 and older are eligible for catch-up contributions and can contribute up to $6,000 in 2008 and 2009.
It is important to note that you can only contribute up to the maximum limit across all individual IRA accounts (self-employed retirement plans may have different rules). I am under 50 years old, so I would be able to contribute any combination of $5,000 between any IRAs I decide to open. For example – $2,500 in a Traditional and a $2,500 Roth IRA, or $3,000 in a Roth IRA + $2,000 in a Traditional IRA, etc. so long as it does not exceed $5,000.
Traditional IRA Deductibility and Roth IRA contribution phase out levels
Roth IRA phase out. The IRS has specific income restrictions regarding who can contribute to Roth IRAs.The income limits are based on your modified adjusted gross income (MAGI), which is calculated on your tax form. Roth IRA eligibility begins phasing out for single filers with a MAGI above $105,000, and for married filing jointly above $166,000. Single filers with a MAGI above $120,000 and married filing jointly with a MAGI above $176,000 are not eligible for Roth IRA contributions.
Traditional IRA deductibility phase out. The Traditional IRA phase out schedule determines whether or not you can deduct your contributions against your taxes. The phase out for Traditional IRA deductions for single filers begins at $55,000 and ends at $65,000. The range for married filing jointly is between $89,000 and $109,000. It is important to note that tax filers with income limits above the deduction levels can still contribute to a Traditional IRA, however, they will not be able to deduct it against their taxes.
More information about IRAs
Individual Retirement Accounts (IRAs) are great investment vehicles, and I highly recommend investing in one if you are able. The benefits you receive from the tax deferrals are a great way to grow your investments without the drag of taxes slowing you down your investments.
Traditional IRA and Roth IRA. There are two main types of IRA accounts available to most people – they are the Traditional and Roth IRA. The short and quick explanation is that Traditional IRA contributions are made with pre-tax money, the investments grow tax free, and the money is taxed upon withdrawal. Roth IRA contributions are made with money that has already been taxed. It grows without the drag of taxes and is withdrawn without any additional taxation. There are certain income limits and other rules involved with regarding deductions and eligibility. Here is more information about the differences between Roth and Traditional IRAs.
Max out your IRAs if possible. It is important to max out IRA investment if possible because you only have one opportunity to do so. Once the window of elgibility closes, it is closed for good.
{ 41 comments… read them below or add one }
Thanks for the great information on IRAs. Also, it is worth noting that you can open a spousal IRA (under your spouse’s name, of course) and max that out as well. That’s what we want to do for my husband, so that we can double our contribution for the Roth IRA.
Great idea, Miranda. I opened a Solo 401k under my wife’s name as well, and contributed (or will contribute!) to both.
Thanks for the basic info. I have an old simple IRA from a previous job and need to learn how to roll it over into another account so I can begin contributing. Everyone says earlier is better even if I would like to add to savings.
Craig: The SIMPLE IRA is actually a retirement plan often run by small businesses; it is not an individual account. Once you leave the business, you can no longer contribute to the account. However, you can leave your Simple IRA in its current form, or roll it into a Traditional IRA (many brokerages like Vanguard or Fidelity will do this at little to no cost).
You can open a Traditional IRA or Roth IRA at any time. Again, you can go to any broker to do this, or open one at your local bank. I recommend using a traditional broker such as Fidelity or Vanguard because this is what they specialize in – they typically have more options and lower fees.
how can you open a 401k for your spouse when it is an employer sponsored plan?
Freddy,
From what I understand, you can open a spousal IRA, but you cannot open an employer sponsored 401(k) plan for your spouse.
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It is important to note that tax filers with income limits above the deduction levels can still contribute to a Traditional IRA, however, they will not be able to deduct it against their taxes.
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If someone has income above the phaseout limit of Traditional but not over the limit for Roth IRA, what’s the point of contributing to Traditional IRA(actually in this case, is that an after-tax IRA now?)? He/she cannot have the tax benefit for the year of contribution thus the same as a Roth, and will need to pay the taxes later while Roth won’t? Feels like a fool if he/she still choose to contribute to Traditional IRA in this situation. Am I misunderstand something?
Thanks
Lin,
I agree, it makes much more sense to contribute to a Roth IRA at that point, if eligible. However, once you get past the point where you can contribute to a Roth, it again makes sense to contribute to a traditional IRA with after tax money, because you can later convert that money into a Roth IRA.
Here is more info about Roth IRA conversions: 7 Things To Know About The 2010 Roth IRA Conversion.
I have a 401k and a 403b with different employers. Does that mean I can only contribute a total of $16500 to both or can I contribute the $16500 to the 401k and another 16500 to the 403b?
Lisa: You can only contribute a total of $16,500 across both accounts. You can split the contribution however you see fit, but I would recommend contributing to each account to get any available company match, then contributing the rest to whichever account has the lowest fees or the best investment options.
@Patrick – Excellent post on the Roth IRA rules. You did a great job in spelling out the rules for IRA contributions in general, especially in regard to contributions. As you state, while a person can contribute to both a Roth IRA and a Traditional IRA in the same year, the TOTAL contribution they can make to either account or both accounts combined is $5,000 if under 50 and $6,000 if over 50. You did a great service to your readers by pointing this out. The unexpected penalties, taxes, and excess contribution paperwork that could result from a misunderstanding of the rules could come as quite a shock to someone who thought the limit applied to each account individually. Since I don’t usually see this pointed out online, you’ve done a good thing.
@Lin – Even when it’s not tax deductible, there’s still a tremendous benefit to a Traditional IRA. For instance, let’s say you make $200,000 per year. As such, you aren’t eligibile to contribute anything to a Roth IRA. So rather than invest in a traditional brokerage account, you contribute $5,000 to a Traditional IRA. Even though it’s not tax deductible, that money grows free of capital gains and income taxes until you withdraw it in retirement. That’s just not the case with a non-tax sheltered account.
That said, since the phase occurs at a lower income level for the Traditional IRA, many people end up “inbetween,” meaning they can still contribute to a Roth IRA, but a Traditional IRA isn’t tax deductible. In such a case, it makes better sense to go with the Roth IRA.
Can I contribute to my Roth even though my wife and I now gross over 200K? Do they look at just my income or both if the the IRA is in my name? If I cannot contribute, can I contribute to a Traditional?
Jay, it depends on your AGI. If you are not eligible to contribute to a Roth IRA, you might consider contributing to a non-deductible Traditional IRA, which can be converted to a Roth IRA in 2010.
am retired age 65 income- pensen and cds can i open a roth? wife in same boat we are not working now.
Jim: Distributions are not required from your Roth IRA during your lifetime, so I believe you can open a Roth (there is a required distribution age for Traditional IRAs).
However, opening a Roth may change your tax situation or your estate. I do not know enough about how this could affect your situation, so I recommend speaking with a financial planner about estate planning and investing for the rest of your retirement.
I have a traditional IRA account; I already reached the max. ($5000). I contributed the money in this year (2009 tax year) and I did not claim any tax deduction on it. Can I withdraw the money without penalty?
On the other hand, my company offered me 401K plan, is it possible to have two accounts, both the Traditional IRA and 401K plan? If yes, what is the maximum limit that I can contribute in each account?
Thanks,
TaxPayer, There are some circumstances under which you can withdraw money from an IRA without paying penalties, but I recommend speaking with a tax specialist to see if you qualify or for more information.
Yes, it is possible to have both an IRA and a 401k. You can read more about that in this article: How Many Retirement Accounts Can You Have?. The maximum you can contribute (under age 50) is $5,000 for an IRA, and $16,500 for a 401k. If you are over age 50 the limits are $6,000 and $22,000 respectively. Best of luck!
If I and my spouse can contrbute the max to IRA, then does it mean 5k for myself and another 5k for my spouse or total 5k for a couple?
Thanks,
Kel, It is $5k for yourself and $5k for your spouse for a total of $10k as long as you meet income requirements.
Due to termination of employment I rolled the money from the 401(K) established by my former employer into a Traditional Roth account. This amount exceeded $5k. Are the additional funds over the max limit just not beneficial as far as taxes? Thanks.
Ramon, Rollover IRAs have the same tax benefits as other IRAs, but they don’t count against your maximum contribution for the year. So you can contribute $5,000 to an IRA this year and still roll money into an IRA from a 401k, even if it is above the $5,000 limit.
My wife is on ssdi – - i started a roth ira for her in her name – - i arranged it so that our bank account is directly depositing twenty-five dollars a week into her Roth IRA account. It is a joint account. My paycheck goes direct to our bank account. I haven’t gotten her into trouble have i? Is she allowed to have a roth ira account if i’m the one putting in the money from my paycheck?
You may be allowed to contribute for your wife’s IRA with what is called a spousal contribution, provided you meet income requirements. However, I am not sure how or if her ssdi affects that. I recommend contacting a financial planner or the IRS for more information – they should be able to give you more complete information based on your situatuon.
I contribute to a ROTH on an automatic monthly basis. $300/mo = $3600/year. I want to max it out, but I’m not sure if my MAGI will be under $105k this year. What happens if it’s over & I already have to much in the ROTH. eg: MAGI=115K, limit would be around $1666. How is that fixed in my ROTH that currently has $3600 in it (or more). Also, when’s the last date I can contribute to my 2009 Roth? Is it before 4/15/2010 or has to be in the calendar year of 2009?
Tara, You must withdraw the excess contributions, plus any earnings, by the due date of your tax return or pay a 6% excise tax on the amount of the over contribution for each year it remains in your IRA.
You can contribute up to April 15, 2010.
Do my contributions to my employer-sponsored SIMPLE IRA count against my individual Roth/Traditional IRA contribution limit? In other words, for the year 2009, can I contribute the full $11,500 to my SIMPLE IRA and also contribute the full $5000 to my individual Roth IRA? I’ve been looking all over the place for an answer to this, and can’t seem to find one.
I have this exact same question. Anybody know the answer?
What is the best Roth IRA type investment to put money into – both my wife and I file jointly and our incomes are above the maximum incomes – can I still invest in a Roth IRA or is there something else out there?
AJ, If you are above the max contribution limits for a Roth IRA, you can still contribute to a Traditional IRA, but it will not be deductible. You can also contribute to an employer sponsored retirement plan if you are eligible (such as a 401k, SEP IRA, 401b, etc.).
If I earn over 200K per year, can I contribute to a Roth IRA? I currently try to max out my 401K, plus company match, but still wish to put more away for more retirement savings.
Mark, Single filers with a MAGI above $120,000 and married filing jointly with a MAGI above $176,000 are not eligible for Roth IRA contributions. You can, however, contribute to a Traditional IRA and convert it to a Roth IRA in 2010 (but you may have to pay taxes to do the conversion).
I currently have a Roth IRA with a broker. I’d like to leave that particular broker. Not sure if I’ll go to another or just do my investments myself. How can I transfer/roll-over/etc.. the Roth I have with that broker? Do I need to sell the mutual funds that are in it now and then re-purchase etc…?
The best option is to decide where you want to maintain your IRA after you transfer it and contact them. They should be able to handle the process for you and will handle all the details. As long as you don’t withdraw the funds as cash, then it shouldn’t matter much as far as taxes go. Be sure to ask about the possibility of fees, from either your current or future broker. Here is more information you may find helpful:
How to Open a Roth IRA
What to Look For When Opening a Roth IRA
Best places to open a Roth IRA
I invested aftertax dollars into a personal non-work 401k for many years, but was forced to liquidate early because of job loss. I realize theres a 10% penalty, but will I also be hammered with the entire distribution as regular income as well on my taxes which will eat up another 30%? Thats in effect being taxed twice (3 times with the penalty) on the same aftertax money…or will I only be penalized additionally on only the earnings portion?
If the former is the case, opening a non-roth IRA with contributions outside of a employer based 401k is probably the worst move anyone can make! In reality theres absolutely ZERO benefit going this route. Why do the “experts” fail to point out these obvious flaws!
Please correct me if Im wrong..and I truely hope I am in this case.
Kurt, Based on my understanding, yes, your distributions count as regular income. So you would pay the penalties, as well as income tax on your distributions.
The only benefit to opening a non-deductible Traditional IRA is the fact that it grows tax free until it is withdrawn in retirement age. That is actually a strong benefit because taxable investments often come with distributions, dividends, and other taxable income that occurs throughout the years. Growing your investments without the drag of taxes can have a huge affect on the bottom line. The disadvantage, is as you mentioned – big penalties if you need to make early withdrawals.
We are a retired couple. We file our income tax married filing jointly. I have an earned income of $500. My husband has no earned income. What is the maximum we can put in our IRA? What about the Retirement Savings Credit? Can my husband and I contribute more to the IRA for that credit?
Gary and Carol, I don’t have an answer for your specific situation. I recommend contacting a professional financial planner, or a tax professional. Right now, for example, you can get a free tax related question answered by TurboTax here: http://www.FreeTaxQuestion.com (through Through January 31, 2010).
Best of luck!
Is there a maximum amount that can be converted to a Roth in 2010? Is there a limit on how much can be converted from a traditional IRA to a Roth IRA in 2010 with the new rules pertaining to those whose income is over $100k?
Thanks,
Naomi
Naomi, From the research I’ve done, I haven’t seen a limit to the amount you can convert. However, there may be tax consequences for the conversion, so the limit could be the amount that you can afford to pay the taxes on. Just a note: the taxes on the income to be claimed can be paid on 2010, or deferred until 2011 and 2012.
This is a situation where you may wish to consult with a professional financial planner or tax professional.
I am about to file my taxes, I think I will be slightly over the single exemption for the Alternative Minimum Tax (AMT). If I contributed to my Roth IRA for 2009, would that help me avoid the AMT?
Am I only taxed on anything above the exemption amount for AMT?
Thank you,
Glen
Glenn, There are a lot of factors that can contribute toward the AMT, and to be honest, I don’t know how they would all work for your situation. I recommend contacting a tax professional for this question.