IRA CONTRIBUTIONS

Individuals who have earned income and are under age 70½ at the close of a tax year may make new contributions to a traditional IRA.  Individuals who are 70½ or older may open an IRA with funds rolled over from a qualified retirement plan, however, these individuals may not make new contributions to an traditional IRA (but might be eligible to contribute to a Roth IRA.)

The maximum annual contribution to a traditional IRA is the lesser of:

$5,000 (in 2011) or
100% of earned compensation.


Example: Kitty Hawke, a high school student, earns $1,200 from baby-sitting. Her maximum IRA contribution for the year is limited to $1,200, which is the amount of her compensation.



Taxpayers, age 50 and older, may contribute an additional $1,000 as a "catch-up" provision. Presumably this is to make up for missed contributions as one approaches retirement age.     

(Please note: The following examples and discussion assume the IRA participant is under age 50 unless otherwise indicated.)

The annual limits apply to "new" IRA contributions. There are no limits on amounts rolled over into an IRA from another qualified plan or transferred trustee-to-trustee.  Individuals may hold more than one IRA account.  However, the annual limit applies to the total new contributions made to all IRAs for the year. The opening of additional IRAs does not increase the contribution limit.

The tax code limits the amount that may be contributed, but does not require an individual to make contributions to an IRA - regardless of the availability of a deduction. However, if a person does not contribute the maximum in a given year, they may not "make-up" the difference with excess contributions in subsequent years.


Example:  

Ed Sanders earns $30,000 in 2010 and contributes only $3,000 to his IRA. In 2011, he again earns $30,000. His 2011 contribution limit is still $5,000. Sanders may not contribute an extra $2,000 to his IRA in 2011 to make up for the contribution he "missed" in 2010.



 Excess contributions

If an individual contributes more than is permitted, the excess is subject to a 6% excise tax.  This tax is cumulative.  The excess contribution (and any earnings generated by it) should be withdrawn by that year's tax filing date (usually April 15th of the following year). If not, the 6% tax applies each year the excess remains in the account, until it is "corrected".  Excess contributions in the past may be corrected by underfunding the account in the future.  (Previous under-fundings cannot be used to correct a current excess.)



Annuity or endowment contracts

An individual who invests in an annuity or endowment contract under an individual retirement annuity cannot contribute more than the annual contribution limit toward its cost for the tax year, including the cost of life insurance coverage (for more on Individual Retirement Annuity Contracts)




 Acceptable forms of contribution

Contributions to an IRA generally must be in the form of "cash", which includes checks or money orders, wire transfers order and even credit cards.  An IRA contribution made by credit card advance is acceptable as long as the bank honors the charge. It is not necessary for the taxpayer to repay the credit card advance before the due date of the year's tax return.

Because new IRA contributions must be made in the form of cash, contributions of property, such as stock or bonds, to an IRA are not allowed. Of course, the IRA custodian may use the cash contribution to purchase securities requested by a self-directed IRA owner. Securities may also be rolled over or transferred to an IRA from an existing  qualified plan or another IRA.




  Timing of IRA Contributions

IRA owners may make contributions to an IRA for a tax year at any time during the year or by the normal filing date for that tax year.  The deadline for IRA contributions is not lengthened by any extensions. For most people, contributions to an IRA must be made by April 15 of the year following the relevant tax year.  Contributors may rely on a post office cancellation mark to prove timely contributions sent by mail.  An electronic transfer is treated as a cash contribution to an IRA on the date that payment and registration instructions are received by the custodian or its agent.



  Designation of year

Since there is a delay between the close of the tax year and the filing date, IRA owners who contribute to an IRA between January 1 and April 15 must indicate the year for which the contribution is being made. If the IRA owner does not notify the sponsor as required, the sponsor must assume that the contribution is for the tax year in which the contribution is made.


Example:

Martha Adams makes a contribution to her IRA on March 1, 2011. However, she does not inform the IRA sponsor whether the contribution is for 2010 or 2011. As a result, the sponsor must assume that Martha made the contribution for 2011.



A taxpayer can file a tax return claiming an IRA contribution before the taxpayer actually makes the IRA contribution. However, the taxpayer must then contribute to an IRA by the due date of the return.


Example:

Liz Dickenson, a calendar year taxpayer earning $25,000, files her 2010 tax return on February 15, 2011. On her tax return, she claims a full $5,000 IRA deduction, even though she has not yet actually made the contribution. On April 10, 2011, Liz sends a check for $5,000 to her bank, designating it as an IRA contribution for 2010. Liz's IRA contribution was timely because she made it before April 15, 2011, the due date for her return.

If Liz did not make a contribution to her IRA by April 15th, she must file an amended tax return to eliminate the IRA deduction. Failure to do so, results in the underpayment of her taxes and may subject the her to additional taxes and penalties.



Similarly, taxpayers who file their return early and did not claim a deduction for IRA contributions, may file amended returns to reflect subsequent contributions made before the April 15th filing deadline. Upon filing of the amended return, the taxpayer is entitled to a refund for the overpayment of taxes.


 Spousal IRAs

Spousal IRAs are available to married couples who file a joint return, and one spouse has no earned income or has less income than their spouse.  The maximum contribution made to an individual retirement plan covering a "working" and "non-working" spouse is limited to the lesser of: 100% of the combined compensation of both spouses, or $10,000 (more if either is age 50 or older).


Example:
In 2011, Juan Enriquez is employed and earns $35,000. Maria, his wife, is a homemaker earning $2,500 from a part-time job. They file jointly, and may set up a spousal IRA - each may contribute $5,000 to an  IRA (for a total of $10,000).

Contributions are permitted to spousal IRAs for the benefit of a spouse who has not reached age 70½ even if the employed spouse receiving compensation is age 70½ or older.


Example:

 Rayston and Melissa Jackson are a married couple. Rayston, age 72, earned $7,500 from a part-time job in 2011.  Melissa, age 66 has no earned compensation. Even though Rayston cannot contribute to his traditional IRA because he is over age 70½, Melissa may still contribute up to $6,000 to a spousal IRA ($5,000 plus $1000 "catch-up" provision).



Divorced individuals may continue to contribute to a previously established spousal IRA.  Alimony is considered compensation for IRA contribution purposes.   

Non-spouse beneficiaries who inherit an IRA may not make new contributions into the inherited account.  They may contribute to their "regular" IRAs, but not the inherited account.  Surviving spouses who inherit an IRA may make additional, annual contributions to the inherited account.