Contributing to Your IRA

The most that you can contribute to your retirement IRA each year in 2002 through 2004 is the smaller of $3,000, or an amount equal to your compensation includible in income for the year. Also, those who are at least age 50 in any of these years can make an additional $500 "catch-up" contribution for the year, increasing their allowable contribution limits to $3,500.

The same limit applies if you have more than one IRA, or more than one type of IRA. The contribution must be from "compensation," which means wages, salaries, commissions, net self-employment income, and other sources of earned income. It does not include deferred compensation, retirement payments, or portfolio income such as interest or dividends. When both a husband and wife have compensation, the limit applies separately to each, so that as much as $6,000 can be contributed.

If one spouse does not work or has very little income, a married couple filing jointly may still contribute up to $3,000 for each spouse's account, as long as the couple's joint earned income exceeds their joint IRA contributions. Separate accounts must be used for each spouse.

An IRA can be established, and/or a contribution made, after year-end. It must be made no later than the due date for filing the income tax return for that year, not including extensions. This generally means that you have until April 15th of the following year to make the contribution, and to deduct it on your tax return if you qualify for the deduction.

You don't have to contribute the full $3,000 every year. You may skip a year or even several years. You may resume making contributions in a later year, but you cannot catch up for years no contribution was made.

If you contribute more than the allowable amount, a 6 percent excise tax penalty will be assessed. This penalty is due for the year of the excess contribution and for each year thereafter until corrected. However, you can generally avoid this tax by removing any excess contributions by the end of the tax year for which they were made.

No contributions may be made to an inherited IRA, in a form other than cash, or during or after the year in which the individual reaches age 70 1/2. For Roth IRAs, however, there is no upper age limit on when contributions can be made.

• Some of your contribution amount may be deductible.
• You may choose to contribute to a Roth IRA instead of a conventional one .
• If you can't make deductible contributions and don't want to or don't choose to contribute to a Roth, you can still make nondeductible contributions.