The Individual Retirement Account celebrates its 30th birthday this year and you can join the celebration. You have until April 15 to make a 2003 contribution. If you've already done that, contribute for 2004. To be eligible, either you or your spouse must have earned income. Here are some tips to help you navigate the IRA rules:
1. Age matters. The regular contribution limit is $3,000, but if you are 50 or older, you can contribute an extra $500. Once you reach 591/2, you can withdraw money from your account without penalty. At age 701/2, you can no longer contribute to a traditional IRA and must start taking withdrawals.
2. Love that deduction. Contributions to a traditional IRA are deductible if you have no employer-sponsored retirement plan or if you have one but fall below IRS income limits. For singles, the deduction is phased out at adjusted gross incomes of $40,000 to $50,000 for 2003 and $45,000 to $55,000 for 2004. For married couples filing jointly, the phaseout is $60,000 to $70,000 for 2003 and $65,000 to $75,000 for 2004.
3. A Roth may be right. Even if you can deduct your traditional IRA contribution, a Roth may be a better bet if you are in a low tax bracket. Contributions to a Roth IRA are not deductible, but withdrawals are tax-free if you follow the rules. Eligibility for a Roth contribution is phased out for singles with incomes between $95,000 and $110,000 and married couples with incomes between $150,000 and $160,000.
4. Better than nothing. If you don't qualify for an IRA deduction or a Roth contribution, you still can make a nondeductible contribution to a traditional IRA. Be sure to file Form 8606 if you do. Investment earnings are tax-deferred.
5. Don't forget your spouse. A nonworking spouse can make an IRA contribution based on your earnings. If you are covered by a retirement plan at work, your spouse's contribution may be all or partly deductible if your joint income is less than $160,000.
6. Give the kids a head start. Children can have an IRA at any age so long as they have earned income. Consider opening a Roth IRA for a child or grandchild and matching their earnings up to the annual contribution limit.
7. Extra credit may be available. Taxpayers with incomes of less than $25,000 (single) or $50,000 (married filing jointly) may qualify for a tax credit based on their contributions to an IRA or a company retirement savings plan. The maximum credit is $1,000. Bad news: Full-time students and dependents don't qualify.
8. Try monthly money. Don't have a lump sum to stash away? Many mutual funds will let you open an account if you sign up for automatic monthly contributions from your checking account. Contributing $250 a month for the next 12 months would give you a $3,000 contribution for 2004.
9. Make a smart choice. Check out your employer's savings plan before contributing to an IRA. At least contribute enough to get the full matching contribution if your employer offers one. 10. Keep an eye on Congress. President Bush has proposed tax-favored savings accounts that would be more flexible and allow workers to set aside more money than IRAs do. Contributions would not be deductible, but withdrawals would be tax-free.
- Sources: www.irs.gov CCH Inc., J.K. Lasser's Your Income tax 2004, Ernst & Young Tax Guide 2004.
