Traditional IRAs vs. Roth IRAs

Contributions to your IRA are entered in the Deductions & Credits section:

1. Open your return in TurboTax.
2. Click the Federal Taxes tab (Home & Business version: Click the Personal tab).
3. Click Deductions & Credits, then proceed to the Your 2011 Deductions & Credits screen.
4. Scroll down to the Retirement and Investments section, and then click the Start or Update button to the right of Traditional and Roth IRA Contributions.

Withdrawals from your IRA are entered in the Wages & Income section:

1. Open your return in TurboTax.
2. Click the Federal Taxes tab (Home & Business version: Click the Personal tab).
3. Click Wages & Income, then proceed to the Your 2011 Income Summary screen.
4. Scroll down to the Retirement Plans and Social Security section, and then click the Start or Update button to the right of IRA, 401(k), Pension Plans (1099-R).

For tax year 2011, the maximum deduction is $5,000 ($6,000 if you're age 50 or older).

However, you may not be able to deduct the maximum if your income exceeds a certain level and you (and your spouse, if filing jointly) are covered by a retirement plan at work.

You can click here for IRS information about IRA deduction limits but it's not necessary; TurboTax will take care of the math so you don't have to.

The IRS has set certain income limits for you to be able to take full advantage of these accounts benefits. These limits are based upon your Modified Adjusted Gross Income (MAGI).

You calculate your MAGI based off of your AGI (adjusted gross income) with certain items added back in. These include foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

Traditional IRA

For a traditional IRA, the limits restrict your ability to claim a deduction for your contributions. You can still contribute to a traditional IRA, but these contributions will no longer be tax deductible. The limits also include a "phase-out" range, where the amount you can deduct is phased out, or is gradually decreased, as your MAGI increases.

For 2012, the income limits also depend upon whether or not you contribute to a company sponsored 401(k) (or other retirement plans) and your filing status. The income limits are as follows:

• If you contribute to a company sponsored 401(k), and
  • You filed Married Filing Jointly or Qualified Widower, your phase out range is $92,000-$112,000
  • You filed Married Filing Separately, but lived with your spouse, your phase out range is $0-$10,000
  • You filed Single, Head of Household, or Married Filing Separately, your phase out range is $58,000-$68,000
• If you did not contribute to a company sponsored 401(k), and
  • You filed Married Filing Jointly, but your spouse is covered by a company plan, your phase out range is $173,000-$183,000
  • You filed Married Filing Separately, but your spouse is covered by a company plan, your rphase out range is $0-$10,000
  • You filed Single, Head of Household, Qualified Widower, or Married Filing Separately or Jointly and your spouse is not covered, you don't have a limit.

Roth IRA

For a Roth IRA, the IRS has set income limits - based on your MAGI - for your ability to contribute to your account. Roth IRAs also have a "phase-out" stage, where the amount you can contribute gradually decreases, until you are no longer allowed to contribute.

For 2012, the income limits are as follows:

• You filed Married Filing Jointly or Qualified Widower, your phase out range is $173,000-$183,000
• You filed Married Filing Separately, but lived with your spouse, your phase out range is $0-$10,000
• You filed Single, Head of Household, or Married Filing Separately, your phase out range is $110,000-$125,000

 Q: I owe $2,000 on this year's return. If I open an IRA for $2,000, it'll wipe out my taxes, right?

That may sound reasonable, but it doesn't work that way.

For starters, if you open a Roth IRA for $2,000, you won't be able to deduct anything, as explained above.

On the other hand, if you open a Traditional IRA for $2,000, you may be able to deduct up to $2,000 from your taxable income – not $2,000 from your tax bill. This is because the Traditional IRA tax benefit is a deduction as opposed to a dollar-for-dollar tax credit.

So, if you owe $2,000 in taxes and open a Traditional IRA for $2,000 (or contribute $2,000 to an existing account), it would, at most, reduce your taxable income by $2,000. In the 15% tax bracket, this translates to a $300 reduction (15% of $2,000) in your tax bill. In the 25% bracket, you'd get a $500 reduction in your tax bill, and so forth.

Q: I entered my Roth IRA contribution in TurboTax but my refund (or taxes owed) didn't change.

Roth IRA contributions aren't deductible, as explained earlier.

Q: I didn't make any contributions to (or withdrawals from) my existing IRA. Do I still need to mention it on my taxes?

No, if you left your IRA alone during 2011, there is nothing to report.

Q: Do I need to report changes in the value of my IRA?

No. The activity inside your IRA, even if it results in significant losses or gains, is not reported.

The only IRA transactions you need to report are contributions, withdrawals, or inheritances.

Q: I rolled my Traditional IRA into a Roth. Why do I owe all this extra tax?

Remember, contributions to a Roth are not tax-deductible, whereas contributions to a Traditional IRA are. Because you haven't yet paid taxes on your Traditional IRA contributions and earnings, you must now "pay up" because the rollover is a Roth IRA contribution.

The good news is that once you retire, your Roth withdrawals will be tax-free.

Q: Where can I get more information about IRAs and taxation?

An excellent place to start is the IRS Retirement Plans FAQs web page.

In-depth, specific guidance is available in IRS Publication 590, Individual Retirement Arrangements (IRAs).