Function

• Each year, the Internal Revenue Service publishes IRA contribution limits and IRA income limits. The 2010 limit for your total Roth and traditional IRA contributions is $5,000 if you are under 50 and $6,000 if you are 50 or older. The IRS's income limits only apply if you are covered by an employer-sponsored retirement plan. Moreover, the income limits do not prevent you from contributing to a traditional IRA. Rather, they determine whether you may deduct your contribution from your income.
  
  

Features

• The IRS establishes both an upper and lower income limit for traditional IRA deductions. If you are under 50 and a single filer in 2010, you can deduct the maximum $5,000 contribution limit so long as your modified adjusted gross income does not exceed $56,000. If your MAGI falls between $56,001 and $66,000, you may deduct up to a portion of the $5,000 limit -- this is called the phase-out range. If your MAGI exceeds $66,000, you are entirely phased out of taking a deduction.
  
  

Spousal IRA Contributions

• Normally you must contribute earned income to an IRA, such as that you make from a job or small business. But if you are a non-earning spouse and file jointly with your partner, you may contribute the full limit. In 2010, spouses who file jointly and participate in an employer-sponsored plan may deduct the full limit if their MAGI does not exceed $89,000. The joint filer phase-out range is between $89,001 and $109,000.
  
  However, there are special limits for non-earning spouses who file jointly, and whose partners participate in an employer-sponsored plan. For instance, if you do not work and are under 50, you may deduct the full traditional IRA contribution limit if your joint MAGI does not exceed $167,000. If your MAGI falls between $167,001 and and $177,000, you may deduct a portion of the limit.
  
  

Considerations

• Even if you are only allowed to deduct part of your traditional IRA contribution, you can still contribute the full limit to your account. This provides a small tax advantage, as assets you place inside your traditional IRA are not taxed as long as they remain in the account. Therefore, you can accumulate and compound tax-free investment earnings over the life of your IRA.
  
  

Expert Insight

• Rules that went into effect in 2010 eliminate the income cap on IRA conversions. Until 2010, you could not roll over your traditional IRA to a Roth IRA if your income exceeded $100,000. With that rule gone, you can contribute to a Roth IRA if your income exceeds Roth IRA contribution limits and traditional IRA deduction limits, by making a nondeductible contribution to a traditional IRA and rolling it into a Roth IRA. This provides a greater tax benefit, as qualified Roth IRA withdrawals are tax free.