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.