IRA Rules

Archive for May, 2008

Roth IRA or Traditional IRA: How To Choose?

Question: How do I determine taxable and non taxible IRA deposits, without proper records??

Like many people I didn’t keep good records. Some years I made non taxable deposits. Other years I had an employer plan and made only taxable deposits. The Gov changed the rules many times, are there records available? Does the Gov track deposits? I’m close to retirement and want to withdraw (taxed deposits) non-taxable amounts first.

Answer: Your IRA provider should have been keeping track. When you made the deposits you should have specified if they were pre or post tax. If you did not specify then you have the burden of proof that they were post tax. If you cannot prove this there is a good likelihood that you will have to pay tax. If you can prove it you should talk to your IRA provider about putting it into a Roth IRA.

You must meet the IRA contribution rules to contribute to an IRA. If you want to contribute to a traditional IRA, you must meet the IRA contribution rules for traditional IRA. If you want to contribute to a Roth IRA, you must meet the IRA contribution rules for Roth IRA which are slightly different from those of traditional IRA’s.

Traditional IRA contributions rules

To contribute to a Traditional IRA, you must:

1. be under age 70 1/2 and
2. have taxable compensation

What is compensation?

Compensation includes:

• wages
• salaries
• commissions
• tips
• bonuses
• professional fees
• earnings from self employment
• alimony or separate maintenance payments included in total income also considered compensation for Traditional IRA purposes.

Beginning in 2004, any nontaxable combat pay you receive is included as compensation for IRAs. Compensation does not include interest, rents, dividends, pension and annuity income, or income not included in total income on the tax return (other than nontaxable combat pay for the military).

If you have more than one Traditional IRA, you must combine all of them and treat them as one when figuring out the amount that you can contribute for the year.

Traditional IRA contribution limit

Contributions to a Traditional IRA cannot exceed the smaller of:

• your total taxable compensation or
• $5,000 ($6,000 if age 50 or older on December 31) – for 2008 tax year
• $4,000 ($5,000 if age 50 or older on December 31) – for 2007 tax year

Spousal IRA contribution rules

If you have earned income, you may establish a Traditional IRA for your spouse but you must be filing a joint tax return. Your spouse does not need to have earned income. When there are two separate IRAs , no more than the IRA contribution limit may be contributed to either one. The total combined contributions to both IRAs cannot exceed the smaller of:

1. your and your spouse’s total taxable compensation or
2. $8,000 ($9,000 if one of your is age 50 or older or $10,000 if both of you are age 50 or older)

If you can not contribute to your own Traditional IRA because your age is over 70 1/2 you may still contribute to your spouse’s IRA until he or she reaches age 70 1/2 but the contribution limit is still $4,000 or $5,000 if 50 or older. See Roth IRA Contribution Rules for the IRS tax rules governing Roth IRA contributions.