Individual Retirement Account - Funding

Funding

Individual retirement arrangements were introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA). Taxpayers could contribute up to $1,500 a year and reduce their taxable income by the amount of their contributions. Initially, ERISA restricted IRAs to workers who were not covered by a qualified employment-based retirement plan. In 1981, the Economic Recovery Tax Act (ERTA) allowed all taxpayers under the age of 70½ to contribute to an IRA, regardless of their coverage under a qualified plan. It also raised the maximum annual contribution to $2,000 and allowed participants to contribute $250 on behalf of a nonworking spouse. The Tax Reform Act of 1986 phased out the deduction for IRA contributions among higher-earning workers who are covered by an employment-based retirement plan. However, those earning above the amount that allowed deductible contributions could still make nondeductible contributions to their IRA. The maximum amount allowed as an IRA contribution was $1500 from 1975 to 1981, $2000 from 1982 to 2001, $3000 from 2002 to 2004, $4000 from 2004 to 2007, and $5000 from 2008 to 2010. Beginning in 2002, those over 50 could make an additional contribution called a "Catch-up Contribution."

Current limitations:

• An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA is a prohibited transaction and disqualifies the fund from its beneficial tax treatment.
• Rollovers, transfers, and conversions between IRAs and other retirement arrangements can include any asset.
• The maximum for an IRA contribution in years 2006 and 2007 was $4,000 for an individual under the age of 50. Individuals aged 50 and older could contribute up to $5,000. For 2008 through 2011, the limit was $5,000 for those under age 50, and $6,000 for those over 50. All contributions must be from income.
• This limit applied to the sum of contributions to Roth IRAs and traditional IRAs.

For example, a person aged 45 who put $3,500 into a traditional IRA this year so far, can either put $1,500 more into this traditional IRA or $1,500 in a Roth IRA. There may be an additional administrative step needed so that the trustee which holds the IRA proceeds actually retitles or transfers the $3,500 Traditional proceeds into the Roth category for their internal bookkeeping to survive an IRS audit.

• The amount of the IRA contributions (both Traditional and Roth) that can be deducted from current-year taxes is partially reduced for levels of income beyond a threshold, and eliminated entirely beyond another threshold, if the contributor and/or the contributor's spouse is covered by an employer-based retirement plan. The dollar amounts of the thresholds vary depending on tax filing status (single, married, etc.) and on which spouse is covered at work (see IRS Publication 590, "Individual Retirement Arrangements").