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

Community property laws. Except as discussed below 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.

Brokers' commissions. Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. For information about whether you can deduct brokers' commissions, see Brokers' commissions, later under How Much Can I Deduct.

Trustees' fees. Trustees' administrative fees are not subject to the contribution limit. For information about whether you can deduct trustees' fees, see Trustees' fees, later under How Much Can I Deduct.

Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. See chapter 2 for information about Roth IRAs.

General Limit

The most that can be contributed 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 for 2001 ($3,000 for 2002 or $3,500 for 2002 if you are 50 or older).

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.)

Examples. George, who is single, earns $24,000 in 2001. His IRA contributions for 2001 are limited to $2,000.

Danny, a college student working part time, earns $1,500 in 2001. His IRA contributions for 2001 are limited to $1,500, the amount of his compensation.

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.

Annuity or endowment contracts. If you invest in an annuity or endowment contract under an individual retirement annuity, no more than $2,000 for 2001 ($3,000 for 2002 or $3,500 for 2002 if 50 or older) can be contributed toward its cost for the tax year, including the cost of life insurance coverage. If more than this amount is contributed, the annuity or endowment contract is disqualified.

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 for 2001 ($3,000 for 2002 or $3,500 for 2002 if you are 50 or older), 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 to a traditional IRA.
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 for 2001 ($6,000 for 2002, or $6,500 for 2002 if only one of you is 50 or older, or $7,000 for 2002 if both of you are 50 or older).

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).

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 2001 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).

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 2001. Because of the spousal IRA limit rule, even though Tom earned less than $2,000, they can contribute up to $2,000 to his IRA for 2001 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.

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 2001. Although he can contribute up to $2,000 for 2001, he contributes only $1,000. After April 15, 2002, Justin cannot make up the difference between his actual contributions for 2001 ($1,000) and his 2001 limit ($2,000). He cannot contribute $1,000 more than the limit for 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. However, a penalty may apply. See Excess Contributions, later under What Acts Result in Penalties.

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