The federal government doesn't want you shielding all your income from taxes in an IRA. The most you can contribute in a year is $5,000, or $6,000 if you're older than 49. In many cases, the IRS imposes a lower limit, either to your total contributions or to how much you can contribute tax-free.
When you file a joint return, the IRS limits your tax-free contributions when your modified adjusted gross income rises above $92,000 -- as of 2012 -- if you also have a 401k or similar work account. At above $112,000, none of your IRA contributions are tax-free. If your earned income is less than $5,000, you face another restriction: you can't contribute more money -- regardless of taxes -- than you earn. So if you have no earned income this year, you can't add to your IRA at all.
Where an IRA is concerned, earned income includes wages, salaries, commissions and self-employment income. Alimony, separate maintenance payments and nontaxable combat pay also count. Earned income does not include interest, dividends, rental income, pensions or partnership income where you don't actively bring money into the business. Compensation you can legally exclude from your income, such as foreign earned income, doesn't qualify. If all your income this year is "unearned," there's only one way to put money into an IRA.
You and your spouse can each have your own IRA with a separate $5,000 limit. If you don't have any earned income this year but your spouse does, she can contribute $5,000 to both of your IRAs, provided her earned income is $10,000 or more. If her AGI is high enough to limit her tax-free contributions, she can make non-deductible contributions to both IRAs instead. As long as she has enough earned income, she can contribute up to $10,000 in after-tax dollars.
You can't always tell what your earned income for the year is going to be. If you contribute to your IRA early on in the year, then end up with no earned income, the IRS will hit you with a 6 percent tax on all the excess contributions. Every year it stays in the account, you pay the 6 percent again. If you withdraw the money before you file your tax return, there's no tax penalty.
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