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How Much Can I Contribute to an IRA in 2012?

Know the maximum contribution limits for IRAs in 2012

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IRAs offer tax advantages to investors: tax-deferred investing and sometimes even income tax breaks on your contributions. Contribution limits are the government's way of making sure you don't get too much of a good thing.

In 2012, the maximum amount that individuals can contribute to a traditional IRA is $5,000 (see 2013 IRA contribution limits). Those who are age 50 or older can contribute up to $6,000. This extra amount is called a catch-up contribution, and it's in place to help older retirement savers build up their nest eggs. The maximum amount that individuals can contribute to a Roth IRA is the same (although these accounts work very differently, more on that below).

With a traditional IRA, if you don't have a retirement plan through work, you can deduct your contributions from your federal and state income taxes. But even if you do have a workplace retirement plan, you may be able to deduct a portion of your contributions. How much you can deduct will depend on your income, with the deduction amount being reduced (or "phased out" in IRS terms) for individuals with modified gross incomes between $58,000 and $68,000, and for couples with modified gross incomes between $92,000 and $112,000 for 2012. If you don't have a retirement plan at work but your spouse does, the deduction amount is reduced for couples earning between $173,000 and $183,000. If you earn more than that, you are unlikely to qualify for any tax breaks.

If you have a 401(k) and are earning less than those amounts, it's a great idea to put money into an IRA and get the tax deduction. If you earn more and don't qualify, you might instead consider a Roth IRA. With a Roth IRA there are no tax deductions available, the contributions that are made to the account have been taxed (in other words, it went from your net paycheck or your checking or savings account into the Roth). But once in the account, you contributions are never taxed again. In a traditional IRA, you will pay taxes on the money when you withdraw it, as well as a 10% penalty if you withdraw before age 59 ½ (although there are some exceptions). So a Roth offers the same tax-deferred investing benefits of a traditional IRA, but without the additional tax deduction. Plus, contributions made to a Roth can be withdrawn before retirement without penalty. However, there are income restrictions on who can own a Roth IRA.

You have until April 15, 2013 to make contributions to an IRA for 2012. This makes an IRA a great, last-minute tax saver when filing your returns. But depending on your employment situation, you may consider another type of retirement account. For example, a freelancer or small business owner may want a SEP IRA or other retirement plan for small business, which have different contribution limits. Limits on all of these retirement plans will vary over time. They are adjusted for inflation every one or two years.

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