The Ins and Outs of IRAs
This week's e-mails include a request for advice from a couple that I'll call Richard and Joan. Both work. But as of now, they are not putting any money into an Individual Retirement Account. And why not? Simply because they believe their salaries are too high to allow them to use these important tools for
Unfortunately, like lots of other working persons, they misunderstand the rules for IRAs. That's not surprising, because there are several kinds. So here are some guidelines for Richard, Joan, and anyone else who needs to know the ins and outs of IRAs.
To qualify for a deduction for 2004 of as much as $3,000 ($3,500 for individuals who are age 50 or older before the end of the year) for funds stashed in a traditional IRA, you must have earned income and be under age 70 1/2. But if neither you nor your spouse is covered by a 401(k) or some other kind of retirement plan at work, it does not matter how sizable your income is.
And if you are covered, or your spouse is? Then be mindful of income limitations. You qualify for the full deduction only if your AGI (adjusted gross income), is less than $60,000 for a married couple filing jointly, or $40,000 for a single person.
You get only a partial deduction when AGI is between $60,000 and $70,000 for joint filers and between $40,000 and $50,000 for singles. There's no IRA deduction for someone who's covered when AGI tops $70,000 for joint filers and $50,000 for singles.
Precluded from using any kind of traditional deductible IRA or, though eligible, prefer to set up a Roth? Most of you meet the requirements for annual contributions of as much as $3,000 ($3,500 if age 50 or older) to Roths.
The eligibility phase-out starts only after AGI tops $150,000 on a joint return and $95,000 on a single return and vanishes when AGI surpasses $160,000 on a joint return, and $110,000 on a single return. There is no requirement of under age 70 1/2 for a Roth, meaning you are able to move money into a Roth
Suppose you've a high enough AGI to bar contributions to traditional deductible accounts or to Roths. Then you can opt to put a nondeductible $3,000 ($3,500 if age 50 or older) in a traditional IRA, increasing for a couple, to $6,000 ($7,000 if age 50 or older). Not until withdrawals start are there any taxes on the earnings generated by contributions, whether deductible or nondeductible. And when withdrawals start, after-tax nondeductible contributions escape taxes; at that time, only earnings and deductible contributions are taxed.
But the rules can get complicated when you start to remove money from the account. The IRS insists you treat all withdrawals as having come proportionately from deductible and nondeductible contributions. It makes no difference if you create separate deductible and nondeductible traditional accounts or establish a single account as the receptacle for both deductible and nondeductible contributions. Also, the IRS treats whatever you withdraw as including a proportionate part of the earnings on deductible and nondeductible funds.
Julian Block, a former IRS agent and a tax attorney, is the author of "The Stock Photographer's Tax Guide." For details on how to purchase this important 32-page publication: http://www.photosource.com/taxtips.php . For Julian's tax saving and tax planning reports, go to http://www.photosource.com/products and click on "2004 Tax Tip Guides." Julian can be reached at julianblock@yahoo.com.
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