This is our first blog post. We chose the subject of IRAs for our first web-log. Why? We need a refresher.
IRAs are pretty straight forward. Most of us only think of rates of returns when choosing IRA options. Traditional IRAs and Roth IRAs are powerful vehicles for building long-term tax deferred wealth. While asset allocation is important, successful navigation of the rules governing IRA contributions will be an essential ingredient to help build that personal fortune.
Always deposit traditional or Roth IRA contributions by the tax filing date of April 15th. Filing a tax extension does not allow for an extension for traditional IRA or Roth IRA contributions. It’s worth repeating, “You have until the April 15th tax return date to make your traditional IRA or Roth IRA contributions.” The IRS gives no extensions or exceptions to this rule, so don’t forget. Also, remember to contribute for your spouse, especially if they are not working. The non-working spouse is allowed a traditional or Roth IRA contribution as long as the working spouse has earnings and they file a joint tax return.
The maximum amount that can be contributed to all IRAs for 2007 is $4,000. If you are 50 or older, you can add an extra $1,000. You cannot contribute $4,000 to a traditional IRA and $4,000 to a Roth. The maximum is a combined $4,000 for all IRA types (SIMPLE IRAs and SEP IRAs have their own sets of rules). The traditional IRA contribution may be deducted on your taxes; the Roth IRA contribution is never deductible.
If you make the mistake of contributing too much, it’s called an excess contribution. Any excess contributions may be assessed with a 6% excise tax penalty. This penalty can be easily avoided by removing the excess contribution by tax filing date, extensions included.
Be sure your IRA contribution is allowed. For example, if you over the age of 70 ½, you are forbidden from making an IRA contribution. However, if the taxpayer turned 70 ½ in 2008, they have until April 15th, 2008 to make that final IRA contribution.
In order to make a contribution, you need earned income. You must have wages, self-employment income or commissions, even alimony counts. Interest, capital gains, dividends and unemployment payment do not count as earned income.
High salaries do not limit traditional IRA contributions. However, your tax deductibility may be limited if you have a company sponsored retirement plan. If you do not have a company sponsored retirement plan, you can deduct 100% of your traditional IRA contribution.
If you are covered by a company plan, your traditional IRA contribution may not be fully deductible. You may still make the contribution; you’ll just be unable to deduct it. For 2007, if you are married and file a joint return, contribution deductibility starts to phase-out when your income hits $83,000. You will be phased-out entirely if your income exceeds $103,000. For single filers, the income range is $52,000-$62,000. The phase-out range increases to $156,000-$166,000 if your spouse is covered by a company plan but you’re not.
With regard to a Roth, the IRS may discriminate against a high salary. In fact, high incomes may disallow a Roth IRA contribution altogether. For 2007, the phase-out range for a married couple is $156,000-$166,000 and $99,000-$114,000 for single taxpayers.
Making a Roth IRA contribution when your salary disqualifies you is an excess contribution. You may be assessed a 6% excise tax on the contribution amount if the excess is not removed by tax filing date plus extensions. Another alternative for these misguided contributions is “re-characterization”. In other words, you can reclassify the type of contribution. For example, an excess Roth contribution can be re-characterized to a traditional IRA contribution (assuming another traditional IRA contribution wasn’t already made for that year).
These are just a few of the rules regarding IRA contributions. The government changes the rules all the time, and it’s you’re responsibility to know the rules. While financial institutions are great at anticipating problematic contributions, they are not infallible and have limited access to your personal situation. Knowing the ABCs of IRA contributions will help to build your personal fortune. When searching for answers with regards to IRAs, refer to IRS Publication 590 (Individual Retirement Arrangements (IRAs)); or, visit the IRS website, http://www.irs.gov/.
