An IRA, which stands for Individual Retirement Account, is a type of retirement savings account that
gives you tax benefits for making contributions. You can open an
IRA yourself and make contributions
without having your employer withhold the contributions.

You can make tax-deferred contributions to a traditional IRA and the amount you contribute is excluded
from your taxable income. Then, your contributions and the interest earnings are taxed when you
withdraw the money at retirement. Another type of IRA, the Roth IRA, lets you deposit post-tax money
and avoid paying taxes on your withdrawals made in retirement.

In 2011, you can contribute up to $5,000 to an IRA if you’re under age 50 or a maximum of $6,000 if you
are older than age 50. This
IRA contribution limits may change in future years. Your ability to claim the
maximum tax deduction depends on your income, whether you’re covered by a retirement plan at work,
and your filing status. With a Roth IRA, you may not be able to contribute at all if you make too much

Traditional IRA Contribution Limits

If you’re covered by your employer’s retirement plan, you may not be able to take a full deduction for IRA
contributions if your income is above a certain level.

  • For single and head of household filers: you can only take the full deduction if you make less than
    $56,000 and no deduction at all if you make more than $66,000. Partial deduction is allowed if
    your income is between those two amounts.
  • Married filing jointly and qualifying widows: the full deduction is allowed for incomes less than
    $90,000 and no deduction if your income is greater than $110,000.
  • Married filing separately: partial deduction only for incomes less than $10,000.

If you aren’t covered by your employer’s retirement plan, you can take the full deduction unless you’re
married and your spouse is covered by a retirement plan at work. For those filing jointly, your income
must be less than $169,000 to take the full deduction, no deduction is allowed for incomes above
$179,000, and partial deduction for incomes in between. If you and your spouse file separately, you must
make less than $10,000 for a partial deduction.  If you file separately and your spouse lives separate
from you, you’re allowed to take the full deduction.

Roth IRA Contribution Limits

Roth IRA contributions are limited by the amount of
money you, and your spouse if you’re married, make
each year. If you’re married and file jointly or you’re a
qualifying widow, you can make the maximum
contribution if your modified adjusted gross income
(MAGI) is less than $169,000. Your contribution amount
is reduced for incomes between $169,000 and
$179,000 and eliminated if you make more than
$179,000, you can’t contribute to a Roth IRA at all.

If you’re married and file separately and you lived with
your spouse anytime during the year, you can only
contribution a reduced amount if your MAGI is between
$0 and $10,000. If you made more than $10,000, you
can’t contribute.

Single, head of household, and those married filing separately who didn’t live with their spouse at all
during the year can make the maximum contribution if they made less than $107,000. If you made
between $107,000 and $122,000, you can make a reduced contribution. And if you made more than
$122,000, you can’t contribute at all.

Withdrawing From an IRA

You generally must wait until age 59 ½ to withdraw money from an IRA without facing a penalty.
Otherwise, you’ll have to pay a 10% tax penalty on the amount you withdraw. Withdrawals from a
traditional IRA must also be included in your taxable income for that year. You may be able to have the
10% tax penalty waived if you use the money for certain types of expenses:

•        Buying your first home,
•        Paying for costs associated with a sudden disability,
•        Paying for higher education expenses for yourself or your kids,
•        Paying for medical expenses that exceed 7.5% of your adjusted gross income.

The IRS requires you to start taking money from your traditional IRA once you turn 70 ½. The amount of
your annual required minimum distributions depends on the amount you have in your account, your life
expectancy, and the life expectancy of your
beneficiary. There is no required minimum distribution (RMD)
for Roth IRAs.

Withdrawals from a traditional IRA are taxed at your regular income tax rate for the year you make the
withdrawal. Roth IRA withdrawals are tax-free as long as you make the withdrawals after age 59 ½ and
the account has been open for at least five years.
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 What is an IRA