Contributions to Traditional IRAs

Traditional individual retirement accounts can receive three specific types of contributions, which are described below:

Rollovers from Qualified Plans or Other IRAs

Rollovers commonly result when a qualified plan makes a lump-sum distribution, usually for one of three reasons: an employer terminates a plan; an employee changes jobs; or an employee retires and wants more control over how the account's funds are invested. If the distribution is rolled over into an IRA, taxes continue to be deferred, just as they were in the qualified plan. There is no dollar limit on rollovers, nor are there age or income restrictions on who may make them.

Nondeductible Contributions

Such contributions are not categorized as tax-deferred, but their earnings are so classified until they are withdrawn. The law restricts who may make nondeductible contributions to those who are 70½ years of age and younger and who have earned income or are married to someone with earned income. There are no income restrictions.

Deductible Contributions

Because such contributions are deducted from AGI, they and their earnings are labeled as tax-deferred. To make a deductible contribution, an individual must meet not only the age and earnings criteria for nondeductible contributions but also several other eligibility requirements. One key test is whether any member of a household--strictly speaking, the "tax unit"--is covered by an employment-based retirement plan. If no one is, then all contributions up to the maximum are deductible. Otherwise, deductibility phases out over certain income ranges. For an individual who is not covered by an employment-based plan but whose spouse is covered, the phaseout range is between $150,000 and $160,000 of AGI. For someone covered by an employment-based retirement plan, the phaseout range depends on the individual's filing status and increases over time. Maximum contributions and phaseout ranges are summarized in Table 1.