IRA contribution limits

An Individual Retirement Arrangement (IRA) is intended to give mid-level earners a tax deferred way to save for retirement. This benefit to the taxpayer in the year

the savings are invested in the IRA is a lowering taxable income and a deferral of taxes on the invested funds, including earnings on those funds.
 

Income level determines contributions

There is however a limit to the amount the government will allow taxpayers to put into a tax-deferred, traditional IRA. These amounts depend on adjusted gross income, with all tax payers having the same maximum allotment. In 2004, the maximum annual contribution was $3,000. For years 2005-2007 that amount is $4,000. It increases again in 2008 to $5,000.

Additional contribution limits if over 50

There are exceptions made for older investors. Those who are 50 years old or older are allowed an additional $500 for 2004 and 2005 and an additional $1,000 per year for 2006 and beyond. These limits are slated to increase by $500 annually when inflation increases by at least the next $500 increment.

Contribute early

The earlier in the year the maximum contribution can be made, the better. With more principle invested sooner, the investor has more funds on which interest can be compounded. Since both the principle and interest are tax deferred, there really is no disadvantage to investing early in the year. If a lump sum payment cannot be made into the IRA, then monthly payments can be made up to the maximum allotted amount.

IRA contributions for last years unused amounts

If in a tax year the tax payer does not reach the maximum allotted contribution, then they have until April 15 of the following year to make a contribution for the previous tax year. If the maximum payment is not reached by that date, they cannot contribute more for that tax year and payments are counted for the current tax year. If the investor is expecting a tax return and files early enough, they could even use that tax return to invest in an IRA for the previous year, if it is done before April 15.

Various IRA contribution options are available

Contributions can be made to one IRA or several IRAs, including the Roth IRA or an education IRA. Other types of IRAs have different rules about distributions, but the combined total of all contributions counts toward the annual limits. When a married taxpayer files jointly with their spouse the maximum contribution takes into account their joint adjusted gross income, regardless of whose name is on the IRA. Married tax payers filing separate tax returns are treated as single filers for the purpose of contribution limits and adjusted gross income requirements.

No minimum IRA contributions requirement

While there are restrictions as to the maximum amount an investor can contribute to an IRA, there is no minimum amount. Some investments with banks, such as certificates of deposit, have minimum deposit requirements. If an investor has only a few hundred dollars to invest in an IRA, then they can take advantage of the tax deferred savings. Investors should keep in mind when determining how much they can afford the savings in taxes paid out. A contribution of $3,000 in pre-tax dollars does not reduce take home earnings by $3,000 since the amount is not taxed until it is withdrawn.