Retirement Accounts, IRA's, Roth's and 401(k)'s

The contribution limits for both traditional and Roth IRA's for 2011 are $5,000.  Taxpayers who are age 50 and above are permitted to contribute an additional $1,000 for the years 2011 and beyond.

The dollar limit to qualify for a deductible contributions to an IRA for a taxpayer who is not an active participant but whose spouse is an active participant is $173,000 for 2012.

Eligibility

Many taxpayers may not be eligible for a deduction to a traditional IRA.  A deductible contribution is dependent on whether you are covered by another retirement plan.  For 2012 if your income is above $110,000 single or $173,000 married filing joint you are not eligible to make a Roth contribution. 

ROTH IRA Conversions

Beginning in 2010 the modified gross income limitation for IRA conversions is repealed.  Thereafter, any IRA amount may be converted to a ROTH IRA without the previous limitation on gross income.  The taxpayer must still pay the tax on the amount converted.  The 2010 tax brackets have now been extended through 2012. After 2010 the tax on any ROTH conversions will have to be paid in the year of the conversion.

401(k) limits

The limits for 401(k) contributions for 2011 are $16,500 with an additional $5,500 allowed as a catch up contribution for employees over the age of 50.  The limits on contributions increases to $17,000 in 2012.  The catch up contribution amount remains at $5,500.

Roth 401(k)'s

The Roth401(k) is where the employer allows employees to designate 401(k) contributions as Roth 401(k) contributions.  The designated contribution must meet three requirements to qualify.  First, the employee must irrevocably designate amounts as Roth 401(k) contributions when electing to defer compensation.  The taxpayer cannot decide later that tax savings are needed for the current yera and redesignate the contribution as having been made to a regular section 401(k) plan.  Changes can be made only for future deferrals.

Second, contributions must be included in income at the time the emloyee would have received the funds had he or she not elected to contribute to the qualified Roth 401(k) contribution program.  Finally, the deferred amounts must be maintanied by the plan in a separate, designated Roth account.

As with other Roth distributions, the distributions from a Roth 401(k) are are nontaxable.  To be nontaxable, distributions must occur after a five-year period, after the taxpayer reaches age 59 1/2, after the taxpayer's death or on account of the taxpayer's disablity.

The limits on the Roth 401(k) for 2010 and 2011 are $16,500 with an additional $5,500 contribution allowed for persons over 50 years old. The limit on contributions increases to $17,000 in 2012.  The catch up contribution remains at $5,500.  Also, all participants, regardless of income will be eligible to make designated Roth contributions.  Distributions will be required once an individual reaches age 70 1/2, but the assets can be rolled over into a Roth IRA, where distributions are not required.