Individual Retirement Account Rules and Information

Traditional IRA

• When you contribute to a traditional IRA, you are entitled to a tax break when you file your return. Since you are essentially investing with pre-tax dollars, you can save more than you otherwise would have and build your nest egg faster. A traditional IRA is a particularly good choice for the worker who expects to be in a lower tax bracket in retirement, but it can be a good choice for other workers as well.
  
  

Roth IRA

• A Roth IRA is the mirror image of the traditional version. While a traditional IRA provides a tax break in the year the contribution is made, a Roth IRA provides longer-term tax benefits. While workers do not get a tax break when they contribute to a Roth IRA, if they follow the rules they can take the money out tax-free when they retire. That makes the Roth IRA a good choice for any worker who expects tax rates to rise in the future, and those who expect to retire into the same or a higher tax bracket than they were in when they were working.
  
  

Contribution Limits

• For 2011, workers can contribute up to $5,000 to either a traditional IRA, Roth IRA or combination of the two. Workers who are 50 or older can contribute an extra $1,000, for a total of $6,000. Workers can make their annual IRA contributions as early as Jan. 1, or as late as the tax filing deadline. Any money contributed to an IRA must come from earned income, so you must have at least $5,000 or $6,000 in earned income if you want to make the full IRA contribution for 2011. You cannot contribute unearned income, like dividends or capital gains, to your IRA.
  
  

Income Limits

• Not all workers can contribute to an IRA account. The IRS limits these accounts to low- and moderate-income workers, and workers in the highest-income brackets face restrictions on how much they can contribute, and even whether they can contribute at all. Each year, the IRS publishes the income guidelines for both traditional and Roth IRA accounts, and it is important to review them before you make your contributions. If you make a contribution to an IRA and are later found ineligible, you must remove all those contributions, plus any earnings those contributions have made or face a tax penalty.