IRA Rules

Posts Tagged ‘401k’

Question: Should I have my wife with her lower income contribute into Roth IRA instead of me? ?

I am currently 23 and make 60k/yr. My wife is also 23 and currently without a job, but I estimate her income will be between 20-30k/yr. I am currently contributing 10% of my income into a traditional 401k and have been debating contributing to a Roth when it occured to me that SHE should contribute to the Roth because her tax bracket is lower than mine, providing the better tax deal. Would this play out how I imagine it would, or is there some rule with IRA that married couples are taxed at their combined income instead of individual when contributing?
It seems people don’t understand what I am getting at. Lets say I am in a 25% tax bracket and she is in a 15% tax bracket. If she contributes 5k a year into a Roth at her tax rate it would be 4.25k, while if I contributed 5k at my tax bracket into Roth it would be 3.75k towards our retirement. My question is does this infact happen, or does it go by your married joint income when determining your tax bracket?

Answer: It does not matter who contribute to the Roth IRA and besides, you and your spouse only have one common tax rate and the money contributed to the Roth IRA is after-tax money.

I encourage both of you to open a Roth IRA account so one for yourself and one for your wife. There is no Joint IRA because the “I” in IRA means Individual so you can only have your own Roth IRA and so is your wife. Now remember, there’s a contribution limit each year on IRA so don’t over-contribute.

Personal Investment & Loan Tips : 401K vs. IRA

Question: Early withdrawal from IRA used for a first-time home purchase, I need some guidance?

I took out some money from an IRA in 2006. I used it to purchase a home. However, the home is actually not in the United States. However, my name is on the title and some family members are living in the home currently. It is my first home. I am wondering, is this a qualified home purchase for an early withdrawal of an IRA, so that I don’t have to pay the penalties? It was a Roth IRA, so in theory, I should not have to pay anything on this to the IRS.

Now the IRS is writing me telling me that I owe a bunch of money.

I hope someone can help me. All of the guidance that I found online seemed very vague as to what kind of a home purchase qualifies for the early withdrawal.

Answer: When you took out your money in 2006, you needed to report that on your tax return. You received a 1099R for the distribution. It was probably coded for an early distribution of a Roth IRA.

The IRS does not know how much of that distribution is the return of you contribution, or if you have an exception to the penalty. Hence, the big tax bill.

In order to figure the penalty on the distribution, or to document that no penalty applies, you need to fill out Form 5329. If you purchased a first home that was the main home of yourself, spouse, child, grandchild, parent, or other ancestor, you may escape the 10% penalty on $10,000 of the distribution.

If you did not follow the above procedure, you need to seek a professional tax preparer who can do an amendment for you.

If you do not qualify to escape the 10% penalty, then you will owe a penalty on the distribution that represents earnings of the Roth IRA. Again, Form 5329 is required to figure the correct tax.

Page 55 of the following publication explicitly defines what is a qualifying home purchase. There is no requirement that the home be in the United States.

http://www.irs.gov/pub/irs-pdf/p590.pdf

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