As soon as you set up your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). Contributions must be in the form of money (cash, check, or money order). Property cannot be contributed. However, you may be able to transfer or roll over certain property from one retirement plan to another. See the discussions of rollovers and other transfers later in this chapter under Can I Move Retirement Plan Assets?.

Contributions can be made to your traditional IRA for each year that you receive compensation and have not reached age 70 1/2. For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony or file a joint return with a spouse who has compensation. See Who Can Set Up a Traditional IRA?, earlier. Even if contributions cannot be made for the current year, the amounts contributed for years in which you did qualify can remain in your IRA. Contributions can resume for any years that you qualify.

Limits and Other Rules

There are limits and other rules that affect the amount that can be contributed. These limits and rules are explained below.

General limit. The most that can be contributed for any year to your traditional IRA is the smaller of the following amounts:

• Your compensation (defined earlier) that you must include in income for the year, or
• $2,000.

Note. This limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions).

This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. (See Nondeductible Contributions, later.)

Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA (see chapter 2).

Examples. George, who is single, earns $24,000 in 2000. His IRA contributions for 2000 are limited to $2,000.

Danny, a college student working part time, earns $1,500 in 2000. His IRA contributions for 2000 are limited to $1,500, the amount of his compensation.

Spousal IRA limit. If you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts:

1. $2,000, or
2. The total compensation includable in the gross income of both you and your spouse for the year, reduced by the following two amounts.
   1. Your spouse's IRA contribution for the year.
   2. Any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $4,000.

Note. This traditional IRA limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions).

Contributions to traditional IRAs reduce the limit for contributions to Roth IRAs (see chapter 2).

Example. Christine, a full-time student with no taxable compensation, marries Jeremy during the year. For the year, Jeremy has taxable compensation of $30,000. He plans to contribute (and deduct) $2,000 to a traditional IRA. If he and Christine file a joint return, each can contribute $2,000 for the year to a traditional IRA. This is because Christine, who has no compensation, can add Jeremy's compensation, reduced by the amount of his IRA contribution, ($30,000 - $2,000 = $28,000) to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $2,000 is her contribution limit, because $2,000 is less than $28,000 (her compensation for purposes of figuring her contribution limit).

Community property laws. Except as just discussed under Spousal IRA limit, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws.

Age 70 1/2 rule. Contributions cannot be made to your traditional IRA for the year you reach age 70 1/2 or any later year.

Filing status. Generally, except as discussed earlier under Spousal IRA limit, your filing status has no effect on the amount of allowable contributions to your traditional IRA. However, if during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced or eliminated, depending on your filing status and income. See How Much Can I Deduct?, later.

Example. Tom and Rosa are married and both are under age 70 1/2. They both work and each has a traditional IRA. Tom earned $1,800 and Rosa earned $48,000 in 2000. Even though Tom earned less than $2,000, they can contribute up to $2,000 to his IRA for the year, under the spousal IRA limit rule, if they file a joint return. They can contribute up to $2,000 to Rosa's IRA. If they file separate returns, the amount that can be contributed to Tom's IRA is limited to $1,800.

Contributions not required. You do not have to contribute to your traditional IRA for every tax year, even if you can.

Less than maximum contributions. If contributions to your traditional IRA for a year were less than the limit, you cannot contribute more in a later year to make up the difference.

Example. Justin earns $30,000 in 2000. Although he can contribute up to $2,000 for 2000, he contributes only $1,000. Justin cannot make up the $1,000 ($2,000 - $1,000) difference between his actual contributions for 2000 and his 2000 limit by contributing $1,000 more than the limit in 2001 or any later year.

More than maximum contributions. If contributions to your IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. See Excess Contributions, later.

More than one IRA. If you have more than one IRA, the limit applies to the total contributions made on your behalf to all your traditional IRAs for the year.

The limit for contributions to Roth IRAs (see chapter 2) is reduced by contributions made on your behalf to your traditional IRAs.

Annuity or endowment contracts. If you invest in an annuity or endowment contract under an individual retirement annuity, no more than $2,000 can be contributed toward its cost for the tax year, including the cost of life insurance coverage. If more than $2,000 is contributed, the annuity or endowment contract is disqualified.

Brokers' commissions. Brokers' commissions paid in connection with your traditional IRA are part of your contribution.

Trustees' fees. Trustees' administrative fees are not subject to the contribution limit.

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