IRA Contribution Limits

• Each year the IRS publishes contribution limits that cap the total amount you can contribute to your Roth and traditional IRA accounts. In 2010, if you are under 50 you can contribute up to $5,000 to a traditional IRA; if you are 50 or older, you can contribute $6,000. Provided that you do not make too much money, you can deduct this contribution from your income. However, if you are phased out of taking a deduction, you can still make a nondeductible contribution to a traditional IRA.
  
  

Traditional IRA Income Limits

• Traditional IRA income limits only apply to people who participate in an employer-sponsored retirement plan at work. If you are a single filer in 2010 who participates in a work-sponsored program, you can deduct the maximum traditional IRA contribution if you make up to $56,000. If you make between $56,001 and $66,000, you are eligible to take a partial deduction. But if your income exceeds $66,000, you cannot take a deduction.
  
  If your income falls in the phaseout range, you can contribute the maximum amount to your traditional IRA and only deduct a portion. For instance, imagine that in 2010 you are 40 years old and make $60,000. You are eligible to deduct $3,000 of your traditional IRA contribution from your income. You can also contribute another $2,000 that is nondeductible.
  
  

Benefits

• Traditional IRAs allow you to contribute money to a tax-sheltered investment account, which you can then use to purchase assets like stocks, bonds and CDs. The IRS does not tax earnings those assets produce as long as they remain in the account. Beginning the year you turn 59 1/2, you withdrawal amounts from the account without penalty. However, withdrawals are subject to income taxes. If you can't take a deduction for your traditional IRA contribution, the account provides only a limited incentive to save for retirement. For this reason, high earners use a nondeductible traditional IRAs as an account of last resort.
  
  

Roth IRA Conversion Rules

• Nondeductible traditional IRAs don't provide as many benefits as a Roth IRA, because, although contributions to both types of accounts are taxed, Roth IRA withdrawals are tax free. Even so, there are income limits that prevent high earners from contributing to Roth IRAs. If you are a high earner, the good news is that IRS rules that took effect in 2010 created a loophole that make it possible to skirt Roth IRA income limits.
  
  Before, you could not convert amounts from a traditional IRA to a Roth IRA if you made over $100,000. That income cap no longer exists. Therefore, you can make a nondeductible traditional IRA contribution, for which there are no income limits, and immediately roll the money into a Roth IRA.
  
  

Considerations

• If your income falls in the phase-out range for deducting a traditional IRA contribution and you want the deduction, you can split your IRA contribution between a Roth and traditional account. For instance, in the Section 2 example where you were eligible to make a $3,000 deductible contribution, you could contribute up to $2,000 a Roth IRA. Note that the IRS's contribution limits apply to your total Roth and traditional IRA contributions -- you cannot contribute $5,000 to each type of account.