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
Ken Morris Fearing the American worker is being left in the dark, Mr. Morris, a fee based Investment Advisor Representative with Raymond James Financial Services, Inc., helps 401k participants get the most out of their retirement plan.
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Health Savings Accounts - What You Should Know!
Health Savings Accounts - What You Should Know!
by: Keith Thompson
Maybe it took the State of The Union address from President Bush to bring the concept of Health Savings Accounts out into the open for all to see. Whatever the case, this is an idea and reality that is long overdue and a great solution to health insurance for many people. Health savings accounts, coupled with a companion low-cost high-deductible health care insurance plan, will take the bite out of monthly health care costs for many consumers, and provide a powerful savings component at the same time. Let's look at the details.
While Congress passed the legislation creating Health Savings Accounts in 2003, it has taken a while for the word to get out. In a nutshell, the deal is as follows: Health savings accounts are tax-free savings accounts, which are necessarily paired with a high-deductible insurance policy for catastrophic medical expenses. You are able to put as much as...
Health Savings Accounts - What You Should Know!
Ira > Health Savings Accounts - What You Should Know!
Easy Ways to Build Up Your Savings
Easy Ways to Build Up Your Savings
by: John Mussi
Building and maintaining a savings cushion is vital for your financial health. Most financial experts recommend having a minimum of three months' worth of living expenses set aside in case of an emergency, but many people may find it difficult to build up that much money in savings. If you think that you might have difficulty in building up the savings that you need, you might want to consider some of the following ideas.
Focus your spending
Create a budget and track your spending. After seeing where your money goes, it's much easier to decide where you can cut. Then live by it.
Treat saving like a bill
Consider your monthly savings amount a bill that has to be paid. Pay your account every month or every two weeks.
Think small
Many people don't think their budget allows room to save, but even a small amount adds up over time. Depending on the size of your family,...
Easy Ways to Build Up Your Savings
Ira > Easy Ways to Build Up Your Savings
Don?t Knock Taking Your Employer Stock
Don?t Knock Taking Your Employer Stock
by: Ken Morris
Don?t Knock Taking Your Employer Stock
Given the growth of employee-employer savings to meet retirement goals, it is not uncommon for employees to have a significant amount of employer stock in their qualified retirement plans.
When it comes time for employees to leave the nest, most are willing to directly rollover all qualified plan assets into a traditional IRA.
A traditional IRA rollover offers avoidance of an immediate income tax consequence, the retiree remains in control of his/her retirement assets and the benefits of tax deferral can continue.
However, there may be another option available that should be considered, a type of combination approach.
This option involves distributing employer stock to the retiree and directly rolling over the remaining balance of the plan assets into a traditional IRA.
This combination approach, though not for...
Ira > Don?t Knock Taking Your Employer Stock
Know How To Take Your Lumps
Know How To Take Your Lumps
by: Ken Morris
If you are about to retire or change jobs, or if your employer is terminating the company retirement plan, you may be eligible to receive a "lump sum distribution" as defined in the Internal Revenue Code.
Such a distribution may be substantial and may represent the cornerstone of your retirement security.
So it is important to consider your options carefully before making a decision regarding distributions.
Basically, you are faced with two main options.
Should you take a direct distribution and pay your taxes now?
Or should you roll your distribution over into a traditional Individual Retirement Account (IRA)?
If you decide not to roll the distribution over into a traditional IRA, you must pay tax on the distribution in the year you receive it. You will, of course, be able to invest the remainder as you please.
The main benefit of paying taxes on your...
Ira > Know How To Take Your Lumps