Making meaningful contributions to IRAs has gotten a lot easier over the years. Back in 2002, annual contributions to a traditional or Roth IRA were limited to only $2,000. The opportunity to make deductible contributions to traditional IRAs was curtailed by strict income limits, and your income may have also been too high to permit Roth contributions.
That was then. This is now.
Favorable changes to the IRA contribution rules have kicked in. Here’s what you need to know.
Contribution rules for traditional IRAs
For the 2014 and 2015 tax years, you can contribute up to $5,500 to a traditional IRA. If you were age 50 or older as of Dec. 31, 2014, you can contribute up to $6,500 for the 2014 tax year. If you will be age 50 or older as of Dec. 31, 2015, you can contribute up to $6,500 for the 2015 tax year. If you’re married, the same limits apply to your spouse if he or she wants to fund a separate IRA. As a result, the two of you can contribute up to $11,000 (2 x $5,500) and maybe even up to $13,000 (2 x $6,500).
- You have until April 15, 2015 to make an IRA contribution for your 2014 tax year.
- You can make a contribution for the 2015 tax year anytime between now and April 15, 2016. Of course, the sooner you contribute, the sooner you will start collecting the tax benefits
Here are the rest of the traditional IRA contribution ground rules:
- After turning age 70½, you can’t make any more contributions. However, Roth IRA contributions are still allowed (more on that later).
- You, and/or your spouse if you’re married, must have earned income at least equal to what you contribute.
- If you are unmarried and were covered by a retirement plan in 2014, your eligibility to make a deductible traditional IRA contribution for the 2014 tax year is phased out between adjusted gross income (AGI) of $60,000 and $70,000. For 2015, the phase-out range is $61,000-$71,000. (AGI is the number on the last line of your Form 1040; it includes all taxable income items and certain deductions such as the ones for alimony paid and moving expenses.) You can contribute to a traditional nondeductible IRA regardless of how high your AGI might be.
- If you are married and both you and your spouse were covered by retirement plans in 2014, your eligibility to make a deductible traditional IRA contribution for the 2014 tax year is phased out between joint AGI of $96,000 and $116,000. Ditto for your spouse. For 2015, the phase-out range is $98,000-$118,000. You can both contribute to traditional nondeductible IRAs regardless of how high your AGI might be.
- If you are married and only one spouse was covered by a retirement plan in 2014, the covered spouse’s eligibility to make a deductible traditional IRA contribution for the 2014 tax year is phased out between joint AGI of $96,000 and $116,000. The non-covered spouse’s eligibility is phased out between joint AGI of $181,000 and $191,000. For 2015, the phase-out ranges are $98,000-$118,000 and $183,000-$193,000, respectively. You can both contribute to traditional nondeductible IRAs regardless of how high your AGI might be.
Contribution rules for Roth IRAs
The annual contribution limits and the contribution deadline for Roth IRAs are the same as for traditional IRAs. The rest of the rules are different.
- After age 70½, you can still make Roth IRA contributions — as long as you (and/or your spouse if you’re married) have earned income at least equal to what you contribute.
- For unmarried folks, eligibility to make Roth contributions for the 2014 tax year is phased out between AGI of $114,000 and $129,000. For 2015, the phase-out range is $116,000-$131,000.
- For married joint-filing couples, the phase-out range for the 2014 tax year is between joint AGI of $181,000 and $191,000. For 2015, the phase-out range is $183,000-$193,000.
- Eligibility to make Roth contributions is unaffected by whether you (or, if you are married, your spouse) are covered by a retirement plan.
- You can also consider the idea of converting a traditional IRA into a Roth IRA. There is no income limit on the conversion privilege. Even billionaires qualify! For details, see It's the perfect time for a Roth conversion.
Watch out for new IRA rollover limitation
Here is the only bad news about IRAs: starting this year, the IRS has adopted a stricter limitation on how many tax-free IRA rollovers can be done in any one-year (365-day) period. Thankfully, the restriction does not apply to direct trustee-to-trustee transfers between IRAs or rollovers from qualified retirement plans (such as 401(k) plans) into IRAs. You can make these kinds of transactions on a tax-free basis as often as you like. For the full story on the new rollover limitation and how to avoid it, see How to beat new IRA rollover rules.
The bottom line
You can now contribute more to IRAs than in the past, and you have a better chance of being able to make deductible contributions to a traditional IRA. Not too long ago, you could have argued that contributing was barely worth the effort. But it is definitely worth the effort now.
This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2014 Dow Jones & Co. Inc. All rights reserved.