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Individual Retirement Arrangements (IRAs)
Individual Retirement Arrangements (IRAs)
Who can set up an Individual Retirement Arrangement (IRA)?
Who can deduct an IRA contribution?
Should you make a non-deductible IRA contribution?
Who can set up an Individual Retirement Arrangement (IRA)?
Anyone with earned income eligible to contribute
Nonworking spouses also able to contribute
Maximum contribution lesser of $2,000 or earned income
Can establish account and deduct contribution until April 15 of next year
Example
Set up account on April 10, 1997 and deposit $2,000
Can deduct $2,000 on 1996 tax return, if eligible for full deduction
Who can deduct an IRA contribution?
Deductibility limited to low-income workers or those not covered by pension plan
If you or spouse are covered by pension plan, deductibility may be limited
Check your W-2 form to see if you have a pension plan
"X" mark in "Pension plan" in box 6 means you're covered by pension plan
"Pension plans" include 401(k) plans
Deductibility phased out if you or spouse covered by pension plan
Maximum deduction
modified Adjusted Gross Income (AGI)
Single Married joint Married separate $2,000 $25,000 $40,000 $0 1,600 27,000 42,000 2,000 1,200 29,000 44,000 4,000 800 31,000 46,000 6,000 400 33,000 48,000 8,000 0 35,000 and above 50,000 and above 10,000 and above Still can contribute up to $2,000 -- you just can't deduct it if your income is above these levels
Note that IRA deductibility is severely limited for married, filing separately. This is more evidence that filing jointly is usually better
Should you make a non-deductible IRA contribution?
Advantage
- Earnings on nondeductible contributions grow tax-deferred
Disadvantages
- You don't get an immediate tax cut
- You lose flexibility by placing assets in an IRA
- Your taxes will be complicated when you withdraw from your IRA
Advice
Don't make a nondeductible IRA contribution
Instead, consider putting money into a low-dividend paying small stock index fund or a fixed or variable annuity