An individual retirement account (IRA) contribution is the amount of money that a person chooses to put into an IRA in a given year. It is important for each individual to know their personal IRA contribution for tax filing purposes. Any contributions have to be made by tax day, April 15th, to count toward the previous year's taxes.
IRAs are investment accounts intended to be used for retirement. The different types of IRAs are subject to different tax laws. The two most basic types are traditional and Roth.
A traditional IRA contribution is tax-deferred and any money deposited into this account during the last tax cycle can be counted as a deduction. The interest that accrues is also untaxed until the day of withdrawal. Basically, all tax is deferred on a traditional IRA contribution until the day you take the money out. Any funds in this type of IRA have to be withdrawn before the age of 70-and-a-half or they are subject to a 50% penalty. The maximum contribution to this type of account is $3,000 US Dollars (USD) per year.
A Roth IRA contribution is taxed prior to the deposit. The advantage is that neither the growth nor the withdrawals are subject to additional taxes. There are three conditions that must be met for the money to be withdrawn without penalty: the account has to have been open for five years, the contributor must have reached the age of 59-and-a-half, and income must be below $110,000 USD or below $160,000 USD for those filing jointly.
The limit for a total IRA contribution per calendar year is $5,000 USD, or $6,000 USD for anyone over the age of 50. This means that the total IRA contributions to all accounts combined cannot equal more than $5,000 USD or $6,000 USD. For example, someone under the age of 50 can contribute $3,000 USD to a traditional IRA and another $2,000 USD to a Roth IRA. Any contribution above this limit is taxed a penalty of 6%.
A third kind of IRA, the Educational IRA, has been replaced by the Coverdell Education Savings Accounts. These accounts allow parents to contribute to their child's education and apply to any child under the age of 18. Contributions cannot exceed $2,000 USD per child per calendar year. They are not deductible, but the withdrawal is tax- and penalty-free as long as the rules for withdrawal are followed. Just like IRAs, contributors have until April 15th to meet the maximum deposit for the previous year.