Traditional IRAs: Still A Good Idea for 2006
by Ken Morris
Mark Twain once said, "The rumors of my death have been greatly
exaggerated." Like Mr. Twain's rumored demise, the notion that
the traditional Individual Retirement Account (IRA) is no longer
a useful part of a financial plan has been greatly exaggerated.
Contributions to a traditional IRA continue to be a viable
financial and retirement planning tool despite non-deductibility
for some individuals.
All you need to make a traditional IRA contribution are earnings
as an employee or as a self-employed person. The amount that can
be contributed for 2006 is the lesser of $4,000 ($5,000 if you
have attained age 50) or your earnings from your work. There is
no minimum age for making a traditional IRA contribution for tax
purposes. If a 16 year old works for the summer, makes $4,000
and blows it all at the mall, the tax code permits Mom, Dad or
whomever to give him/her $4,000 to contribute to a traditional
IRA on his behalf. There is a maximum age for IRA contributions.
No traditional IRA contributions may be made for people over 70
1/2, even if they are still working as hard as they were at 30
1/2.
An additional contribution of $4,000 is permitted if the
traditional IRA participant has a spouse who doesn't work
outside the home. If both spouses are under age 50, the total
contribution in this situation is $8,000 and the spouses can
divide the amount contributed up any way they choose, so long as
neither receives more than $4,000 into his/her account.
The question of deductibility is often confusing to many
taxpayers. There are two questions that may have to be answered
to determine if a traditional IRA contribution is fully
deductible, partially deductible or not deductible. The first
question is: "Are you covered by a plan?" If the answer is "no,"
then the traditional IRA contribution is deductible regardless
of the taxpayer's income. Whether or not you are covered by a
plan depends on the type of employer-sponsored plan in place. If
you're not sure, your employer can tell you because employers
must check a box on every employee's W-2 stating whether they
are covered.
If the answer is "yes" and you are covered by a plan but your
spouse is not, then only you are exposed to the next test. Your
spouse's contribution to a traditional IRA is fully deductible
up to new phase-out limits of $150,000 to $160,000 of joint
income. If both of you are covered by a plan then the next test
will determine to what extent both of you can deduct your
contributions.
Assuming coverage by a plan, the next question that must be
answered is: "How much is your income?" For 2006, taxpayers with
adjusted gross income (AGI) of $50,000/75,000 (single/married
filing jointly) or less, the contribution is fully deductible.
For taxpayers with AGI over $60,000/$85,000 (single/married
filing jointly), no IRA deduction is permitted. For those with
an AGI between those levels, the amount of the deduction is
phased out proportionately. There is a $400 floor to the
deduction that will apply to those whose AGI is close to the
upper limit.
For example, a single person who is covered by an employer's
plan has an AGI (excluding the IRA deduction) of $55,000. Since
that's 50% of the way from $50,000 to $60,000, the taxpayer may
deduct $2,000 of a $4,000 contribution ($4,000 * 50%). The other
$2,000 of the contribution is non-deductible.
The best part of the traditional IRA deal is the tax-deferred
growth potential your investments can enjoy inside the account.
Your earnings will grow much faster when not dragged down by the
weight of a current tax bill. Your financial planner can show
you whether and how a traditional IRA can fit into your
retirement plan.
About the author:
"Can somebody please help me watch, manage, invest or oversee my
401k" is the question Mr. Morris hears most often that causes
him the most concern. Fearing the American worker is being left
in the dark, Mr. Morris, a fee based Investment Advisor
Representative, based in Central Ohio, with Raymond James
Financial Services, Inc., helps 401k participants get the most out of their retirement.
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