IRA's were created with the passage of ERISA, the Employee Retirement Income Security Act of 1974. At that time, contributions were fully tax deductible, but could only be made by individuals not covered by a retirement plan through their employer. The maximum amount that could be contributed was limited to the lesser of 15% of compensation or $1,500. Subsequent legislation has changed many things about IRA's, and further changes are possible in the near future. The current limit is the lesser of 100% of compensation or $2,000, and while anyone with earned income can contribute regardless of participation in an employer sponsored retirement plan, the contribution might not be deductible. Recent legislation has also created the Roth IRA, therefore requiring the use of the terms Traditional IRA or Regular IRA to avoid confusion.

Contributing to an IRA
To be eligible to establish and contribute to a Traditional IRA, an individual must be under age 70½ by the end of the year, and they (or their spouse if filing a joint return) must have earned taxable compensation during the year. Compensation or "earned income" includes wages, salaries, tips, professional fees, bonuses, commissions, self-employment income, alimony, and other amounts received for providing personal services. For purposes of contributing to an IRA, compensation does not include earnings such as rental income, investment income, pension or annuity income, deferred compensation, disability payments, Social Security, or foreign earned income.

Contribution Limits
As mentioned above, the maximum that can be contributed to an IRA is the lesser of the compensation earned during the year or $2,000, regardless of whether contributions are made to more than one IRA (including Roth IRA's), or whether the contributions are deductible. Many people assume that they can contribute more than $2,000 as long as they do not deduct it. Unfortunately, that is not the case, and the IRS imposes penalties if an individual contributes more than is allowed, which is referred to as an "excess contribution."

The IRS has made a provision for a "non-earning" spouse to also contribute up to $2,000 per year to an IRA, as long as one spouse earns at least $4,000 in order for each to contribute the maximum amount. Prior to 1998, the non-earning spouse was limited to a contribution of $250. A spouse who earns less than $2,000 per year can still contribute the $2,000 limit, provided the other spouse earned at least $4,000 in compensation.

Deductibility of Traditional IRA Contributions
Many investors mistakenly believe that their income is "too high" to permit them to contribute to a Traditional IRA. When IRA's first became available in the mid-1970's, that was a possibility, but current IRS regulations allow anyone who meets the age and compensation requirements described above to contribute to an IRA. If an individual or their spouse is not covered by an employer-sponsored retirement plan, their IRA contribution is fully deductible, regardless of income level. However, if an individual or their spouse is covered by a retirement plan at any time during the year, they can still contribute to a Traditional IRA, but their ability to deduct the contribution may be reduced or eliminated. Investors with modified adjusted gross income in the ranges listed below who are or have been active participants in employer-sponsored retirement plans during the year qualify for partial IRA deductions.

	Tax Year                Married Participants	Single Participants
	2000		$52,000-$62,000		$32,000-$42,000
	2001		$53,000-$63,000		$33,000-$43,000
	2002		$54,000-$64,000		$34,000-$44,000
	2003		$60,000-$70,000		$40,000-$50,000
	2004		$65,000-$75,000		$45,000-$55,000
	2005		$70,000-$80,000		$50,000-$60,000
	2006		$75,000-$85,000		$50,000-$60,000
	2007		$80,000-$100,000		$50,000-$60,000