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How Much Must You Earn to Have an IRA?

Original post by Mark Kennan of Demand Media

The Internal Revenue Service limits participation in individual retirement accounts, or IRAs, based on earnings. To determine your eligibility to contribute, you need to know how the IRS defines “earnings” for the purposes of IRAs. A faulty understanding of tax law could lead you to miss out on making a tax-deductible contribution or subjecting yourself to tax penalties for making contributions when ineligible.

Compensation Defined

You must have compensation during the year to contribute to an IRA. Compensation generally refers to money that you are paid for performing services, such as paychecks from your employer and self-employment wages. Compensation does not include interest income, Social Security payments or other unearned income. If your compensation for the year is less than your IRA contribution limit, then you can only contribute up to the amount of your compensation. For example, if your IRA contribution limit is $6,000 but you've only earned $1,500 in compensation, you cannot contribute more than $1,500.

No Future Earnings Requirement

The compensation requirement only applies to the year in which you contribute to your IRA. The IRS does not require that you earn compensation in future years to keep your IRA open. If you meet the compensation requirement this year, but you earn no compensation the following year, your past IRA contributions are not affected, but you won’t be able to make an additional contribution for that year.

Roth IRA Earnings Limits

The IRS puts income limits on how much you can earn to contribute to a Roth IRA for the year. The limit is based on your modified adjusted gross income (MAGI), which is your adjusted gross income minus certain deductions that you claimed on your income tax return. The limits change each year and the IRS sets different limits for each filing status. For example, in 2011, the maximum MAGI for a single filer is $122,000 while the maximum MAGI for a joint filer is $179,000.

Traditional IRA Deduction

The IRS also imposes earnings limitations based on the MAGI for some taxpayers who want to deduct contributions to traditional IRAs. If you or your spouse can contribute to an employer plan, such as a TSP or 457 plan, you may not be able to deduct your traditional IRA contribution if your MAGI is too high. The IRS updates the limits annually, and they differ depending on your filing status and whether you or your spouse is covered. For example, if only your spouse is covered, your MAGI limit is $169,000 to claim a deduction, and if you are both covered, the limit is $110,000.

                   

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About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

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