Are you self-employed, or employed by someone else in an activity for which you receive earned income or compensation? If so, then you're eligible to make a contribution to either a traditional or a Roth IRA. Cue the marching band!
Traditional IRA eligibility
If you have earned income and are under age 70 1/2, you're allowed to make contributions to a traditional IRA. The only question is whether that contribution will be deductible -- it depends on your income tax filing status and whether you (or your spouse) participated on any day of the year in an employer's qualified retirement plan.
In general, if neither you nor your spouse participated in a 401(k) or other qualified retirement plan, your contribution will be fully deductible.
If you (or your spouse) did participate in an employer-sponsored retirement plan, then your contribution to a traditional IRA might be deductible, depending on your modified adjusted gross income (AGI). (Modified AGI for most folks is the same as the adjusted gross income on the last line of the first page of Form 1040.) The deductible amount of a traditional IRA contribution declines to zero between certain AGI ranges, as follows:
|AGI For Contributions In:
|Married filing separately
|Single or Head of Household
|Married filing jointly
|Joint filers if you're not covered by qualified retirement plan, but your spouse is
Within these ranges, the deductible amount declines toward zero as the AGI goes up. For example, for a married couple filing jointly in 2011, the deduction starts to decline at $89,000 and becomes zero by $109,000. Alternatively, if you're single, and your AGI was $50,000, you would be able to fully deduct your IRA contribution. If your AGI was $57,000, you would be able to deduct part of your contribution. If your AGI was $66,000 or higher, you would not be able to deduct your contribution at all.
Roth IRA eligibility
If you have earned income, then you may contribute to a Roth IRA regardless of your age, provided your modified AGI doesn't exceed certain limits. If you're a single filer, then you can make a full contribution to a Roth if your modified AGI is less than $105,000 in 2011 and $110,000 in 2012. You may make a partial contribution to a Roth when your modified AGI is between $105,000 and $120,000 for 2011 or between $110,000 and $125,000 for 2012. But when your modified AGI reaches that upper limit, you're no longer eligible to contribute to a Roth at all.
The phase-out range for a Roth IRA contribution for a married couple filing a joint return is $167,000 to $177,000 in 2011 and $173,000 to $183,000 in 2012. For a married person filing separately, the phase-out range is $0 to $10,000 for both years.
These rules are complicated, so if you need more help figuring out your options, consider checking in with our Rule Your Retirement newsletter service. Not only will you learn about IRAs and other retirement accounts in each monthly issue, but you'll also get access to specialized discussion boards where you can get your answers about IRAs answered by experts. You can try it free for 30 days.
Eligible for both a Roth and a traditional IRA? Then you've got a choice to make. Let's weigh your options next.