Contributions to an IRA have been increased for 2002 and beyond.
Beginning next year, and through 2004, taxpayers are allowed to contribute up to $3,000 to an IRA. For 2005-2007 the contribution
limit increases to $4,000, and up to $5,000 in 2008 and after. For 2001, contributions to an IRA remain at $2,000.
Taxpayers are allowed to make an IRA
contribution provided they have "compensation." Compensation includes wages, salaries, alimony, and other amounts received
for personal services. Compensation does not include pension or annuity income, or any amount received as deferred compensation.
Contributions are limited to the lesser of your compensation or the applicable dollar limits. In other words, if you work
during the year and only earn $1,500, you are only allowed to contribute $1,500 to your IRA. If you file a joint return, a
contribution on behalf of your spouse can be made based on your combined compensation. For example, if you earn $30,000 and
your spouse earns little or no income, you can contribute up to $2,000 to each of your IRAs for 2001.
Whether or not your IRA contributions
are deductible depends on whether or not you or your spouse is an active participant in a qualified employer provided retirement
plan. You are an active participant in an employer plan for any taxable year in which you or your employer makes a contribution
to the retirement plan. If you are an active participant in 2001, your deductible contribution is reduced if your modified
adjusted gross income is over $33,000 ($53,000 if you file a joint return) and completely nondeductible when your modified
adjusted gross income is $43,000 ($63,000 if you file a joint return). The rules are a bit different if only your spouse is
an active participant in a qualified employer provided retirement plan. In that case, if your combined modified adjusted gross
income is less than $150,000, you may make unreduced deductible contributions to your IRA. Once your modified adjusted gross
income exceeds $160,000, your IRA contribution is nondeductible.
If your contributions to an IRA are
nondeductible, you may want to consider putting your money into a Roth IRA instead. Roth IRA contributions are never deductible.
In general, the same rules apply, you must have compensation before you are allowed a contribution and your modified adjusted
gross income must be less than $95,000 ($150,000 if you file a joint return). No contributions to a Roth IRA are allowed if
your modified adjusted gross income is over $110,000 ($160,000 if you file a joint return). If your modified adjusted gross
income is over $10,000 and you are married and file a separate return, you are not allowed to make a Roth IRA contribution.
The advantage of a Roth IRA is that qualified distributions, including the earnings, are not taxable. A qualified distribution
is one that is made after the contributions have been in the Roth IRA for at least five years and one of the following occurs:
1) you reach age 59½; 2) distributions are made to your estate or a beneficiary after your death; 3) distributions are made
on account of you becoming disabled; or 4) distributions are made to purchase a first home (not to exceed $10,000).