Maximizing your IRA

Now that the tax season is behind us, it is a good time to think about your 2008 Individual Retirement Account (IRA). As our life expectancies continue to grow at a rapid rate, it has become increasingly more important to save for retirement early and often. Let’s take a look at the new rules that can impact your 2008 IRA contribution.

Currently you can contribute the lesser of up to $5,000 or 100 percent of your earned income for the year. Earned income is defined as employment income, self-employment income or alimony. If you are 50 or older, you may contribute an additional ‘catch-up’ contribution of $1,000 for a total of $6,000.

If married and filing jointly, an additional $5,000 may be contributed for a lesser-earning spouse as long as you and your spouse are filing jointly. If the spouse is 50 or older, you are also eligible for the ‘catch-up’ provision. This means that a married couple could contribute up to $10,000 per year before any eligible ‘catch-up’ contributions. Even if your spouse is not currently working, a couple can make the maximum contribution for both as long as your total earned income is greater than the maximum contribution.

Option 1: A traditional IRA is an IRA where contributions may or may not be tax-deductible, depending on several factors. The money grows tax-deferred while in the account and is considered ordinary income when it is withdrawn.

The deductibility of contributions first depends on whether you, the taxpayer, are an ‘active participant’ in a retirement plan at work. If the taxpayer (and spouse, if married) is not an active participant, contributions can be deducted regardless of Adjusted Gross Income (AGI). If the taxpayer is an active participant, then the deductibility depends on your AGI. For individual tax filers, the deductibility of contributions is phased out when AGI is between $53,000 and $63,000. An individual cannot deduct their contribution if their AGI is over $63,000.

For married couples, the phase-out limits in 2008 are between $85,000 and $105,000. For married couples where the contributing spouse is not an active participant, but the other spouse is, the phaseout limits are between $159,000 and $169,000.

It is important to note that a 10 percent penalty will be imposed on any withdrawals or distributions before age 59 1/2. There are a few exceptions to this rule so check with your advisor first.

Option 2: A rollover IRA is an IRA that is established so the owner can transfer a qualified plan at retirement, such as a 401(k) plan, into the rollover IRA and maintain control over the investments. A qualified rollover allows funds to maintain their tax-deferred status.

Option 3: The third IRA option is a Roth IRA. Although contributions are not deductible, the money is not subject to tax under qualified distributions. Qualified distributions are made after a five-year waiting period and the occurrence of some other event such as the participant attaining age 59 1/2, the death or disability of the participant, or qualified first-time home purchase expenses up to $10,000. However, contributions may be withdrawn penalty and tax-free at any time. The phase-out limits for single filers are from $101,000 to $116,000. If the AGI is over $116,000, contributions to the Roth IRA cannot be made. Partial contributions may be made for income between $101,000 and $116,000. For married filers, the phase-out limits are $159,000 and $169,000.

For anyone whose income is below $100,000, provisions exist to convert a traditional IRA to a Roth IRA (this income limit will be eliminated beginning in 2010). Converting a traditional IRA, however, will cause the portion of the IRA that has not been taxed (deductible contributions and all earnings) to be taxed as ordinary income in the year of the conversion. This can have a dramatic impact on your taxes so check with your advisor first before converting IRA assets.

Please remember that everyone’s situation is different and you should always consult your advisor before making any decisions. If you would like to learn more about the guidelines for your 2008 IRA, please contact my office at (412) 258-1101.

Kevin C. Krul is First Vice-President and Financial Advisor with Hefren-Tillotson. He may be reached at 412-258-1101 or kkrul@hefren.com. The Wexford office of Hefren-Tillotson is located at 4001 Stonewood Drive.