Types of IRAs

• There are two main types of IRAs: Traditional IRAs, which feature tax-deductible contributions, tax deferral and withdrawals taxable as income in retirement; and Roth IRAs. Roth accounts do not allow for tax-deductible contributions. However, earnings are tax-free, and you never have to pay income taxes on that money again. Both accounts come with a 10 percent penalty on most wthdrawals prior to age 59 1/2, though in the case of the Roth, that applies to earnings only, as long as the money has been left in the Roth at least five years.
  
  

IRA Contribution Limits

• As of March 2011, you may contribute up to $5,000 per year to any combination of IRAs. Your total contribution to all IRA accounts combined, whether they are to Roth IRAs or to traditional IRAs, may only amount to $5,000 per year. If you are over age 50, however, the limit increases to $6,000 per year.
  
  

Deductible vs. Nondeductible IRA Contributions

• Ordinarily, most workers with incomes below certain thresholds can deduct contributions to traditional IRAs. At higher income levels, your ability to deduct contributions is reduced, and eventually eliminated altogether. You can still make a $5,000 contribution per year, but you may not be able to deduct the full contribution, or any of it, depending on your income. Your contribution, however, still grows on a tax-deferred basis. When you withdraw the money, however, it is taxed as income. This is a generally less favorable taxation arrangement for long-term investors than the capital gains tax rate.
  
  

Earned Income Requirement

• To put new funds into your IRA (excluding rollovers), you must have earned income of at least that amount for the year. You may, however, make a spousal contribution of up to $5,000 per year ($6,000 for spouses over age 50), even if your spouse does not personally earn income. Congress allows the nonworking spouse to accumulate retirement savings in this way.
  
  

Excess Contributions

• In some circumstances, you may accidentally contribute more than the allowable limit to an IRA. When this occurs, the IRS imposes an excess contribution penalty of 6 percent per year on contributions and earnings until you withdraw the money.
  
  

Rollovers

• You can roll an unlimited amount of funds from a qualified retirement plan such as a 401k, or from a SEP or SIMPLE IRA, into a traditional IRA. Some plans may impose limitations, however. For example, some 401k plans do not allow for in-service withdrawals. You may have to wait until you leave the company. There are ordinarily no taxes due on a rollover. You can also roll into a Roth IRA, but you will have to pay income taxes on the amount rolled over and converted to a Roth. See IRS Publication 590 for details.