Recs

19

Step 2: Am I Eligible?

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: 2013 2014
Married filing separately $0-$10,000 $0-$10,000
Single or Head of Household $59,000-$69,000 $60,000-$70,000
Married filing jointly $95,000-$115,000 $96,000-$116,000
Joint filers if you're not covered by qualified retirement plan, but your spouse is $178,000-$188,000 $181,000-$191,000

Within these ranges, the deductible amount declines toward zero as the AGI goes up. For example, for a married couple filing jointly in 2013, the deduction starts to decline at $95,000 and becomes zero by $115,000. 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 $60,000, you would be able to deduct part of your contribution. If your AGI was $69,000 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 $112,000 in 2013 or less than $114,000 in 2014. You may make a partial contribution to a Roth when your modified AGI is between $112,000 and $127,000 for 2013, or between $114,000 and $129,000 for 2014. 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 $178,000 to $188,000 in 2013 and $181,000 to $191,000 in 2014. 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.


Read/Post Comments (4) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 21, 2009, at 5:06 PM, slakk wrote:

    As a single filer, I can participate in a traditional IRA and contribute a maximum amount no matter what my income (it was over 130k), but not be able to write it off?

  • Report this Comment On April 25, 2010, at 4:19 PM, Churchill77 wrote:

    how about foreigners that live outside US?

  • Report this Comment On November 25, 2012, at 10:53 PM, retireewannabee wrote:

    slakk, depends on your AGI, not gross income. also depends on whether you (or your spouse) has 401k at work. In general, yes, you could contribute max to traditional IRA with no deduction. In which case, I'd suggest contribute to a Roth instead.

    Churchill, not sure if non-citizen has any eligibility or use for US/IRS product? You'd want to consult your own country's pension/retirement plans.

  • Report this Comment On November 27, 2012, at 3:01 PM, TempoAllegro wrote:

    What about American citizens working abroad? I've been trying to find this out for quite some time and am willing to hire the proper professional.

    It is hard to find the right tax professional because I heard I need to use the last state of residence before moving abroad as my state of residence for tax purposes, and then I would need a tax professional from that state to answer my questions. However, I had lived on the other side of the country from my family home before moving abroad years ago, and this inconvenient point throws me off. I'm almost at the point of calling the IRS, but even then I do not know which part of the organization to call.

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