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With
IRA’s there are many types that produce differing tax results, some of
which may not be as favorable as another, depending on factors like
participation in a company retirement plan and your level of income. Here
are some general guidelines as to what each of the major IRA’s provides
regarding benefits when planning your taxes.
The
traditional IRA is deductible in determining income when certain factors are
right regarding your situation. First, presuming you are married, if you and
your spouse both have earned income and neither of you participated in a
company-run pension plan, you may both make IRA contributions and deduct up
to $3,000, no matter the amount of earned income you had. This would be true
too if your spouse had no earned income.- -
Second,
if you had earned income and contributed to a company-run pension,
your income level will determine whether you may still receive the $3,000
deduction. If your modified adjusted gross income (MAGI) was under $60,000,
you and your spouse may still contribute to a traditional IRA and deduct the
$3,000. Once you are above the $60,000 income level, the deductibility
begins to be phased out for IRA’s.
If
your MAGI is between $70,000 and $150,000 and you are contributing to the
company pension, than you yourself cannot take an IRA deduction, but your
spouse who is not contributing to a company plan can take a
$3,000 deduction (whether they are working or not). Lastly, if you have
earned income and you are over $160,000 in MAGI (and contribute to your
company plan), then neither of you may deduct contributions to your IRA.
In
addition, if you are otherwise eligible for an IRA deduction and you turn 50
years of age by December 31, you may deduct $500 more to your contribution,
resulting in a $3,500 total deduction.
Some
other IRA’s offer different benefits, one of which may be a fit for your
situation. These include the Roth IRA, the Non-deductible IRA, and the
Education (Coverdell) IRA.
-The
Roth IRA. The Roth allows you to contribute $3,000 to a retirement account
that results in non-taxable withdrawals of principal and earnings; however,
you receive no current-year deduction for the contribution made. This stands
in contrast to the traditional IRA (described above), which allows the
deduction now, but results in a taxable withdrawal of principal and earnings
later. Additionally, the Roth is phased out eventually for making
contributions- but at much higher income levels than for the traditional IRA
($150,000 MAGI if married filing jointly).
-The
Non-deductible IRA. Very-high income level people who are phased out from
using the traditional and Roth IRA’s normally use the non-deductible IRA
to contribute to a retirement. Like the Roth, there is no current-year
deduction, but unlike the Roth there is only a non-taxable withdrawal of
principal, while any earnings withdrawn are taxable.
-The
Education Coverdell (or Education) IRA. This IRA benefits not the
contributor but a designated beneficiary for their qualified education
expenses. The contribution limit is only $2,000. It is like the Roth in that
there is no benefit in the current year, but the withdrawals of principal
and interest are both tax-free. The designated beneficiary can be any child
under the age of 19, and the expenses may go towards qualifying elementary
and secondary school expenses as well as future college expenses. The MAGI
phase out for the Education IRA begins at $190,000 and it is eliminated at
$220,000 MAGI.
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