Saving The "Conventional" Way

With a conventional IRA, if you're under age 70 1/2, you can contribute up to the annual limit to your IRA account. However, if your taxable compensation is less than the annual limit in a given year, your contribution will be limited to the amount of your compensation.

Conventional IRA contributions are generally deductible on your tax return. However, you can designate that they be nondeductible. If you make this choice, you build up a basis in your IRA so that when you begin to withdraw from the account, part of each withdrawal is nontaxable. However, the choice not to deduct an IRA contribution should be made with caution in light of your particular tax situation. This is especially true since recent law changes involving IRAs allow only nondeductible contributions to certain types of accounts (see more under Roth and Education IRAs below).

If you're married, file jointly and your spouse has little or no compensation, a conventional IRA may be set up as a spousal IRA, allowing your spouse to make IRA contributions based upon your compensation. However, neither spouse can deposit more than the annual limit to his/her individual account. IRA Contribution Limitations do apply,

Participation in other plans:

One complication of conventional IRAs affects taxpayers who actively participate in other pension plans-e.g., an employer plan, a Keogh or SEP, etc. When you are covered by another pension plan, your IRA deduction "phases out" (i.e., gradually reduces to zero) depending on your filing status and your income level. Phase out begins at income levels according to the following schedule:

* The Single threshold applies to taxpayers other than those filing joint
except Married Separate taxpayers who have a threshold of $-0-.
Through 2006, if your income exceeds the above thresholds by
less than $10,000, your IRA deduction will be limited;
if it exceeds the threshold by $10,000
or over, you get no IRA deduction.
After 2006, $20,000 will be substituted for the
$10,000 amount for taxpayers filing married joint.

Break for spouse of an active participant:

The limits on deductible IRA contributions no longer apply to the spouse of an active participant. Instead, the maximum deductible IRA contributions for an individual who is not an active participant but whose spouse is an active participant, is phased out for the non-active individual if the couple's combined AGI is between $150,000 and $160,000.

Example:
A wife is on active participant in a retirement plan but her husband is not. The couple's combined AGI is $200,000. Neither spouse can take an IRA deduction because their AGI is over $ 160,000.

But assume the couple's combined AGI was only $125,000. Since the husband isn't on active participant in another plan, he can make a deductible IRA contribution. However, his wife can't make one because the combined AGI is over the threshold for joint filers ($50,000).

Due date for making conventional IRA contributions:

Conventional IRA contributions (whether deductible or nondeductible) must be made by the due date (without extensions) of the return for the year to which they apply.

Conventional IRAs   ROTH IRAs   DEEMED IRAs

Participation in Other Retirement Plans

Contribution Limits     Education IRAs