Mark Twain once said, "The rumors of my death have been greatly exaggerated." Like Mr. Twain's rumored demise, the notion that the traditional Individual Retirement Account (IRA) is no longer a useful part of a financial plan has been greatly exaggerated. Contributions to a traditional IRA continue to be a viable financial and retirement planning tool despite non-deductibility for some individuals.
All you need to make a traditional IRA contribution are earnings as an employee or as a self-employed person. The amount that can be contributed for 2006 is the lesser of $4,000 ($5,000 if you have attained age 50) or your earnings from your work. There is no minimum age for making a traditional IRA contribution for tax purposes. If a 16 year old works for the summer, makes $4,000 and blows it all at the mall, the tax code permits Mom, Dad or whomever to give him/her $4,000 to contribute to a traditional IRA on his behalf. There is a maximum age for IRA contributions. No traditional IRA contributions may be made for people over 70 1/2, even if they are still working as hard as they were at 30 1/2.
An additional contribution of $4,000 is permitted if the traditional IRA participant has a spouse who doesn't work outside the home. If both spouses are under age 50, the total contribution in this situation is $8,000 and the spouses can divide the amount contributed up any way they choose, so long as neither receives more than $4,000 into his/her account.
The question of deductibility is often confusing to many taxpayers. There are two questions that may have to be answered to determine if a traditional IRA contribution is fully deductible, partially deductible or not deductible. The first question is: "Are you covered by a plan?" If the answer is "no," then the traditional IRA contribution is deductible regardless of the taxpayer's income. Whether or not you are covered by a plan depends on the type of employer-sponsored plan in place. If you're not sure, your employer can tell you because employers must check a box on every employee's W-2 stating whether they are covered.
If the answer is