Contributory IRAs
The term "contributory" merely indicates that the IRA is or as been funded by contributions from the individual, rather than by a lump sum rolled over from a previously existing retirement plan. The latter would be called a "rollover IRA." Distinguishing between the two types is not as important as it once was. Under the old tax rules, if amounts from these two types of IRAs were "co-mingled" in one account, none of the amounts could be rolled back into a qualified plan. Now the rules have been relaxed to allow a rollover of both all pre-tax amounts in IRA back to a plan (if the plan will accept it), making this distinction less important.
Contributions & Deductions
Each individual is limited to making a contribution to the lesser of $5,000 ($6,000 if the individual is at least age 50) or the amount of his or her "compensation." In general, "compensation" is income you receive from working, such as wages, salary, tips, commissions, and self-employment income. "Compensation" also includes alimony or separate maintenance payments received.
The following are among the types of income which are not "compensation":
- Rental income
- Interest and dividend income
- Pension annuity payments
- Deferred compensation
- Income from a partnership or limited liability company in which you do not provide material income-producing services
The deductibility of IRA contributions for any year can be affected by whether or not the individual is a participant in a tax-favored retirement plan, the individual's tax return filing status, as well as the amount of the individual's "adjusted gross income" for that year. However, to the extent an individual is not eligible to make a full deductible contribution for any year, he or she can still make a nondeductible contribution to an IRA and have the earnings on those contributions grow on the same tax-favored basis as earnings on deductible contributions.
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