The federal government came up with IRAs as a way for you save for retirement. IRAs have tax benefits and higher earning capabilities than regular savings accounts, but there are conditions placed on who can contribute and when, as well as contribution limits -- depending on the type of account. You can also designate a person other than yourself to manage your IRA funds or make contributions on your behalf depending on your marital status.
IRAs can be opened at a bank, with a mutual fund or life insurance company, or through your stock broker. You can begin making contributions as soon as the account is opened, by yourself or through your sponsor, in the form of cash, check or money order.
You may open as many IRAs as you like, but the combined total of all your contributions can’t exceed the maximum annual limit. For traditional IRAs and Roth IRAs alike, the 2012 limit for contributions to a traditional IRA is $5,000 or your taxable compensation for the year, whichever is smaller. For tax year 2013, it is $5,500. For Roth IRAs, however, the maximum contribution may be further limited by your filing status and your income.
Amounts rolled over into an IRA don’t count against your limits, and contributions can be made anytime during the year or by the due date for filing your tax return for that year. If you want a contribution made between Dec. 31 and tax filing deadline applied to the previous tax year, you must make that clear. Otherwise, it will be applied in the current tax year.
Income and Age Requirements
You can only contribute to an IRA if you are earning income, and there are certain kinds of income that don’t qualify. Profits from the sale of real estate, earned interest and annuity income don’t count, while self-employment income, commissions and alimony pay do. You may use money received from your income tax return. Many people find this a good way to get an IRA started. For traditional IRAs, you have until the year you turn 70 1/2 to make contributions, while Roth IRAs have no age restrictions.
If you aren't working but you and your spouse file a joint tax return, your spouse may make an IRA contribution on your behalf. This is called a spousal contribution, and even though your spouse is making the contribution, it must still go into your account. IRAs are individual accounts, as the name suggests, and cannot be shared or opened jointly. Other exceptions to the income rule include those that apply to military members receiving differential pay or nontaxable combat pay.
The earnings from your IRAs grow completely tax-free. With Roth IRAs, your contribution is made with income that has already been taxed, allowing qualified withdrawals to be non-taxable. Contributions made to traditional IRAs are tax-deductible. The amount of your adjusted gross income, whether or not you're participating in an employee sponsored plan such as a 401(k), and whether filing alone or jointly will all be factors when determining tax deductibility.
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