IRA Contribution Rules and Limits for 2008

I have previously written about retirement accounts for self-employed individuals. Another option for retirement saving is the Individual Retirement Account (IRA), which is available for any individual. IRAs are gaining steam as a powerful retirement account after some favorable changes to the tax law. Up until a few years ago IRA contributions were limited to $2,000 and had severe income limitations. There are two types of IRAs, traditional and roth. At a very basic level, a traditional IRA is funded with before-tax dollars and a roth IRA is funded with after-tax dollars.

Traditional IRA Contribution Limits

For 2008 you can contribute up to $5,000. If you will be 50 years old by December 31, 2008 your contribution limit is $6,000. As a married couple the contribution limits are effectively $10,000 and $12,000 as both you and your spouse are eligible for a traditional IRA. Once you turn 70.5 years of age you are unable to contribute further to a traditional IRA. The last contribution limit is that you must have earned income equal to the contribution for that respective year.

Traditional IRA contributions have no income limitations, however, there are income limitations for deducting the value of the contribution.

Traditional IRA Deduction Limits

If you are not covered by an employer retirement plan, you are eligible to deduct your traditional IRA contributions. If you are covered by an employer retirement plan, you may be eligible to deduct your traditional IRA depending on you income. If you’re unmarried, your contribution deductibility begins to phase out if your adjusted gross income (AGI) exceeds $53,000 and completely phases out at $63,000. If you’re married and both you and your spouse is covered by an employer retirement plan, your contribution deductibility begins to phase out if your joint AGI exceeds $85,000 and completely phases out at $105,000.

It gets slightly complicated if only one spouse is covered by an employer retirement plan. For the covered spouse, the contribution deductibility begins to phase out if your joint AGI exceeds $85,000 and completely phases out at $105,000. For the non-covered spouse, the contribution deductibility begins to phase out if your joint AGI exceeds $159,000 and completely phases out at $169,000.

Contributions are still allowed after the fully phased out income limit is reached, you just won’t be able to use it as a tax deduction. If you’ve reached fully phased out income limit, you might want to think about funding a roth IRA instead.

Roth IRA Contribution Limits

The contribution limits for a roth IRA are equivalent to a traditional IRA. One important difference is that you can still make roth IRA contributions once you reach the age of 70.5 if you still have earned income equal to your contribution amount (i.e. income from hobbies).

As opposed to the traditional IRA, the roth IRA has income limitations for contributions. For unmarried individuals, the contribution limit begins to phase out with an AGI of $101,000 and completely phases out at $116,000. For married individuals, the contribution limit begins to phase out with a joing AGI of $159,000 and completely phases out at $169,000.

Unlike a traditional IRA, a funding a roth IRA is not dependent on the availability of an employer sponsored retirement plan.

My IRA Conclusions

As per my goals section, I will be trying to fully fund my Roth IRA as soon as my condo down-payment is complete. I chose to open a roth IRA instead of a traditional IRA because I did not want to have all of my retirement funds taxed as I withdrew money. I am planning on opening a solo 401k and invest all of my self-employed income with pre-tax dollars. Investing with a roth IRA will allow me to have options when I begin to withdraw money from my retirement nest egg. Also, a roth IRA has extra benefits for leaving money for the future generations, which is very appealing.

IRAs are becoming powerful investment vehicles for retirement funds as contribution limits are expected to increase with inflation. Don’t forget to take advantage of one of these retirement funds before the income tax deadline, April 15, 2009.

Advertisements

6 Responses to IRA Contribution Rules and Limits for 2008

  1. Stretch IRA says:

    Thank you for the wonderful tips. I hope this will help people understand what they are up against when choosing an IRA.

  2. […] presents IRA Contribution Rules and Limits for 2008 posted at Personal Finance Start-Up […]

  3. John D. Hopkins says:

    I am retired and under the age of 70.5. May I contribute to my IRA based on my investment income until I reach the age of 70.5?

  4. Kellie says:

    The root cause of the crash is excessive debt. Entire nation cannot borrow non-stop, inflate the money supply and prices with borrowed money and then hope that all will be fine when the pay back time arrives.

  5. They learn about the large guys, and gurus referring to rectos and
    plats, and wonder the way they occasion to arrive. If you play Guild Wars frequently, you probably come in make contact with with bots all the time and don’t even know it. You can get more Reputation Points for each kill by gaining an extra level in the Norn Hunting Party.

  6. great publish, very informative. I ponder why the opposite specialists of this sector
    don’t notice this. You should continue your writing.
    I’m sure, you’ve a huge readers’ base already!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: