IRA Contribution Questions
What are the IRA contribution limits?
For tax year 2005, the maximum annual
contribution will jump to $4,000, then
$5,000 in 2008. After that, limits will be
adjusted in $500 increments annually for
inflation.
There’s another contribution limit you
should know about if you’re saving for your
child’s K-12 or college education. The
Coverdell Education Savings Account (ESA)
lets you save $2,000 per year, per child.
Do I have to make the maximum
contribution to my traditional or Roth IRA?
No, that’s simply the most you can put in
per year. But here’s why you would want to
contribute the maximum if you’re eligible:
Assume you put in $4,000 on January 1 each
year and earned a 5% return. After 10 years,
you’d have over $13,000 more than you
would’ve had by contributing only $2,000
each year. And after 30 years, you’d have
almost $70,000 more! That’s a big difference
in your retirement nest egg!
Keep in mind that to contribute the
maximum to a Roth IRA, you must fall within
certain income limits: a modified adjusted
gross income (MAGI) of up to $95,000 if you
file a single tax return and a MAGI of up to
$150,000 if you file jointly. But as long as
you have earned compensation and you’re
under age 70½, you can always make the
maximum contribution to a traditional IRA –
regardless of your income. Your traditional
IRA contributions may not be tax-deductible,
but you still stand to gain from
tax-deferred growth.
What is a “catch-up” IRA contribution,
and am I eligible?
The name says it all – “catch-up”
contributions are specifically designed to
help those who are getting closer to
retirement catch up on their retirement
savings. You’re eligible as long as you’re
at least 50 years old during the year the
contribution is for, and of course, as long
as you meet the eligibility requirements for
traditional or Roth IRAs.
Here’s how they work. For tax year 2006
the catch-up contribution is $1,000 above
and beyond the regular contribution limit.
The bottom line is a lot more money for your
retirement.
Do I have to make my entire annual
contribution to an IRA at one time?
If you wish, you certainly can put your
whole year’s contribution in at once. But
you can make it a lot easier on your
pocketbook with payroll deduction at the
credit union. This convenient method spreads
your IRA contribution over the entire year,
helping you to save regularly and avoid the
hit of a lump-sum payment.
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