A:

With an adjusted gross income (AGI) of more than $100,000, only your eligibility to deduct contributions to a Traditional IRA will be affected.

Even if you are unable to deduct your Traditional IRA contribution, you may still contribute up to the limit for the year ($4,000 for 2005, plus an additional $500 if you reach age 50 by Dec 31, 2005) to your Traditional IRA and treat the contribution as a nondeductible contribution. If you choose to make a nondeductible contribution to your Traditional IRA, you should file IRS Form 8606 (available at the IRS website) to report the contribution as nondeductible to the IRS and to keep track of the nondeductible balance (basis) in your Traditional IRA.

You would also need to file Form 8606 for each subsequent year you distribute assets from your Traditional IRA, to determine the taxable portion of the distribution.

If you are not eligible to deduct the contribution to a Traditional IRA, and you are eligible to contribute to a Roth IRA, then the Roth may be the better choice. This is because the earnings on Roth IRA assets accrue tax-deferred and are tax free if distributions are qualified, whereas the earnings in a Traditional IRA accrue tax-deferred but are taxed when distributed. You are eligible to contribute less than 100% of your compensation or up to the limit for the year ($4,000 for 2005, plus an additional $500 if you reach age 50 by Dec 31, 2005) to a Roth IRA if your income is as follows:

RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  3. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  4. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  5. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
  6. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
Related Articles
  1. Retirement

    Infographic: How Much Money Do You Need to Retire in Hawaii?

    In this infographic we break down cost of living in Honolulu, Hawaii in terms of taxes, rent, food and other expenses and offer comparison to the cost of living in New York, Los Angeles, San ...
  2. Term

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  3. Term

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  4. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  5. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  6. Investing Basics

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  7. Investing Basics

    6 Reasons Why Dividends Should Be Reinvested

    Learn about the advantages of dividend reinvestment programs and how they may benefit longer-term investors who want to build a position in a company.
  8. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  9. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  10. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
RELATED TERMS
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Normal Profit

    An economic condition occurring when the difference between a ...
  4. Theta

    A measure of the rate of decline in the value of an option due ...
  5. Derivative

    A security with a price that is dependent upon or derived from ...
  6. Security

    A financial instrument that represents an ownership position ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!