Deductible IRA Contributions Available to More Individuals
LThe Phase-out limits are the AGI where reduction of the $3,000 deductible amount starts. To calculate the phase-out amount, take the amount over the limit, divide by $10,000 ($20,000 after 2006), and multiply the result by $3,000, to get the reduced amount that can be deducted.
| For Taxable Year Beginning | Joint Return Phase-Out Limits | Single Return Phase-Out Limits |
| 1998 | $50,000 | $30,000 |
| 1999 | $51,000 | $31,000 |
| 2000 | $52,000 | $32,000 |
| 2001 | $53,000 | $33,000 |
| 2002 | $54,000 | $34,000 |
| 2003 | $60,000 | $40,000 |
| 2004 | $65,000 | $45,000 |
| 2005 | $70,000 | $50,000 |
| 2006 | $75,000 | $50,000 |
| 2007 and beyond | $80,000 | $50,000 |
For example, in 2003, a single taxpayer has AGI of $32,000. This is $1,000 over the $31,000 limit. $1,000 divided by $10,000 multiplied by $3,000 equals 300 reduction. Thus, this single taxpayer can only deduct $2,700 for an IRA contribution. The taxpayer can still contribute $3,000, but the additional $300 will not be deductible.
These limits are only for active participants. If one spouse is not an active participant, other limits apply.
Deductible Contributions for Spouses of Active Participants.
If the spouse of an active participant in a employee-sponsored retirement plan is not an active participant, the limits for the spouse are as follows if a joint return is filed.
If the combined AGI on the return is less than $150,000, a fully deductible $2,000 contribution can be made by the non-participating spouse. For AGI between $150,000 and $160,000, the deductible contribution is reduced using the same formula as for an active participant.
For example, Russ and Rena have a combined AGI of $100,000 in 2003. Rena is an active participant in an employee-sponsored plan, Russ is not. Russ can deduct up to $3,000 for an IRA since the combined AGI is less than $150,000. Rena cannot deduct any amount for an IRA since AGI is above the $60,000 maximum limit ($50,000 + $10,000).
IMPACT
A broader range of taxpayers with higher incomes will not be able to contribute to a deductible IRA for tax-deferred growth along with immediate tax savings from the deduction.
Roth IRA – Nondeductible Contributions
An individual can make a nondeductible contribution to a Roth IRA up to the excess of lesser of $3,000 or 100% of the individual’s annual compensation. This amount is further reduced by any contribution made to a traditional IRA. Unlike a traditional IRA, contributions can be made after reaching age 70 ½.
Unlike a traditional IRA, there are AGI limits for all taxpayers. For a joint return, if AGI exceeds $150,000, the maximum $2,000 amount is reduced by $200 for each additional $1,000 over $150,000. If AGI reaches $160,000, the allowable contribution is 0. For a single taxpayer, the reduction begins for AGI over $95,000 with reductions of $300 for each additional $1,500 over $95,000, reaching 0 for AGI over $110,000.
Qualified Distribution
In order for a distribution from a Roth IRA to be tax-free, certain criteria must be met.
For example, on April 15, 1999, a married taxpayer with combined AGI of $155,000 makes a maximum $1,000 contribution to a Roth IRA for tax year 1998. The taxpayer withdrawals the entire account balance on Jan 2, 2005, at age 60. The withdrawal, including all earnings, are tax-free.
Impact
The amount rolled over from a traditional IRA into a Roth IRA does not count toward the AGI limitation of $100,000.
For example, a taxpayer with AGI before rollover of $50,000 can rollover a maximum of $200,000 since one quarter of this added to $50,000 equals $100,000.
To Convert or not to Convert
If you are eligible to convert your regular IRA into a Roth IRA, the following factors should be weighed when coming to a decision on whether to proceed with the rollover.
Factors such as age, financial status, expected IRA investment earnings and expected marginal tax rate should be considered when weighing the cost-to-benefit relationship.
Remember, distributions from a traditional IRA are taxable to the extent of the earnings, whereas for Roth IRAs, all earnings are tax-free if the distribution requirements are met.
IRA Distributions for First-Time Homebuyers
Under current law, if a taxpayer takes an "early withdrawal" from an IRA, a 10% early withdrawal penalty applies. A"first-time homebuyer" may be able to escape this penalty.
To escape the penalty, the distribution must be made by a "first-time homebuyer" to pay the "qualified acquisition costs" of acquiring a principal residence. The distribution must be used within 120 days. The "first-time homebuyer" can be an individual, spouse, any child, any grandchild, or ancestor of the individual or spouse. The withdrawals cannot exceed $10,000 during the individual’s lifetime.
A "first-time homebuyer" means anyone who has not had an ownership interest in a principal residence during the two-year period ending with the date when the contract of sale is entered into, or the date when construction begins.
"Qualified acquisition costs" means the costs of acquiring, constructing, or reconstructing a residence.
If the 120-day rule cannot be met, the taxpayer can deposit the distribution into the same or another IRA, as long as the limitations on IRA rollover contributions are met.
IRA Distributions to Pay for Higher Education
Penalty-free distributions from an IRA can be made before the age of 59 ½ if the funds are used to pay qualified higher education expenses. The withdrawal will be subject only to regular income tax
Qualified higher education expenses include tuition at an eligible post-secondary educational institution as well as room and board, fees, books, supplies and equipment required for enrollment or attendance. Graduate level course expenses are also covered