Friday, August 8, 2008


Part I – Traditional IRA

Contributions to a “traditional” IRA are either deductible or non-deductible. If you are an active participant in an employer-sponsored pension plan, such as a 401(k), a 403(b) or a SEP, the amount of your traditional IRA contribution that is deductible is phased-out for a “modified” Adjusted Gross Income (MAGI) for tax year 2008 of $53,000 to $63,000 if filing as Single or Head of Household, or $85,000 to $105,000 if married and filing a joint return.

“Modified” AGI in this case begins with “regular” AGI and adds back the-

· foreign income and housing exclusions
· savings bond interest exclusion for higher education costs
· adoption assistance benefits exclusion
· deduction for student loan interest
· deduction for qualified tuition and fees
· deduction for domestic production activities

Deductible contributions are made with “pre-tax” dollars. If all of your contributions to all of your IRA accounts over the years were fully deductible, then all IRA distributions are fully taxable. Amounts that were “rolled-over” to an IRA from a pre-tax employer plan like a 401(k) are treated as deductible contributions.

Non-deductible contributions are made with “after-tax” dollars. You have already paid income tax on these contributions. Accumulated non-deductible contributions make up your “basis” in the IRA. If some of your IRA contributions over the years were non-deductible, then a portion of any IRA distribution is a tax-free return of your after-tax contributions. The tax-free portion is determined by a special formula and is calculated on IRS Form 8606.

Many taxpayers have more then one IRA account, and each individual account may have a different mix of deductible and non-deductible contributions. However, when you calculate the tax-free portion of a traditional IRA distribution all monies in all traditional IRA accounts are lumped together.

You must begin to take annual minimum distributions from your traditional IRA once you reach age 70½. Once you turn age 70½ you can no longer make contributions to a traditional IRA, even if you continue to work and have earned income. Upon your death your beneficiaries will be taxed on withdrawals from an inherited traditional IRA.


You can contribute to a ROTH IRA for 2008 if your “modified” AGI (same as above) is under 116,000 if Single or Head of Household, or $169,000.00 if Married Filing Joint.

Contributions to a ROTH IRA are made with “after-tax” dollars. ROTH IRA contributions are never deductible. Qualified distributions from a ROTH IRA are totally tax free.

A qualified distribution is one that is made after a 5-year holding period, beginning on the first day of the first year you make a contribution, and is made after the taxpayer reaches age 59½, or due to death or disability or for a qualified “first-time” home purchase. The earnings portion of a non-qualified distribution is fully taxable and may also be subject to a 10% penalty.

You do not have to begin taking annual minimum distributions from a ROTH IRA when you reach age 70½. You never have to touch the money in a ROTH IRA during your lifetime. You can continue to make contributions to a ROTH IRA after you turn age 70½ as long as you have earned income. If you are still working at age 80 you can contribute to a ROTH IRA. Beneficiaries do not have to pay income tax on distributions from an inherited ROTH IRA.


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