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MORE
IRAs FOR YOUR MONEY |
The individual retirement account (IRA) got a
major makeover in 1997, thanks to Congress and
the White House. The upshot: Consumers have two
new IRAs to choose from, and the old standby "regular"
IRA will be available to more people.
Why the changes?
"I think the government has come to realize
they had to do this," says Maureen Tsu, a
certified financial planner in San Juan Capistrano,
Calif., and board member of the Denver based Institute
of Certified Financial Planners (ICFP). "Because
there will not be enough for retirement if we
just depend on Social Security."
New IRA opportunities are "a carrot to get
people to put more money away," notes Judy
Lau, a certified financial planner in Wilmington,
Del., and president of the ICFP. "People
aren't saving enough at retirement. If these new
options work to get people to save more, they
will be well worth it." Here's rundown of
all the IRA changes, effective in 1998.
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INCOME
LIMITS |
In 1986, the government set Income Limits on
IRA deductions for taxpayers having qualified
retirement plans at work. This year's changes
boost those limits. In 1998, for contributions
for the 1998 tax year, single people can take
a full deduction for IRA contributions if their
incomes is less than $30,000, and a partial deduction
in their income is from $30,000 to $40,000. Singles
with incomes greater than $40,000 still can contribute,
but there's no deduction. Married people filing
jointly get a full deduction if income is less
than $50,000, and a partial deduction if income
is from $50,000 to $60,000. Married filers with
income greater than $60,000 still can contribute,
but there's no deduction.
After 1998, the income limits will keep edging
upward annually until the income limits for deductibility
reach $50,000 to $60,000 for single filers and
$80,000 to $100,000 for married filers. Single
taxpayers will get a full deduction if income
is less than $50,000, and a partial deduction
if income is less than $50,000 to $60,000. Married
couples filing jointly will qualify for a full
deduction if income is less than $80,000 and a
partial deduction if income is in the $80,000
to $100,000 range.
The maximum annual regular
IRA contribution has increased from $2,000 to
$3,000 as of 12/31/01.
Under the spousal contribution rule, a non-working
spouse can contribute up to $3,000 annually based
on the earnings of the working spouse. But starting
with contributions for the 1998 tax year if you're
not an active participant in the qualified retirement
plan but your spouse is, the rules change. Then,
all allowable IRA contributions are fully deductible
up to a $150,000 joint income and partially deductible
if your joint income is between $150,000 and $160,000.
There's no deduction if your income's greater
than $160,000. As before, if you and your spouse
have no qualified retirement plan at work, your
IRA contributions are fully deducible.
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PENALTY
WAIVERS |
The 10% penalty for withdrawing IRA funds before
you reach age 59½ now will be waived if
you use the money for a first time home purchase
(lifetime withdrawal limit is $10,000) or higher
education expenses.
In addition, the penalty is waived for certain
qualifying medical expenses, to pay for health
insurance during qualified periods of unemployment,
and if you become disabled.
But, remember, you still must pay taxes on money
withdrawn, and you'll lose years' worth of compound
earnings on any sum you withdraw. Thus, avoid
dipping into your IRA if possible. "Remember,
it is a retirement account." says Todd Robertson,
a Plan America® representative in the Plan
America Center at WESTconsin Credit Union, Menomonie,
Wis. "It's not a college funding account,
not an I want a house by the lake account. It's
there to supplement your retirement income.
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EDUCATION
IRA |
This IRA allows you to save for any post secondary
education. You can now invest up to $2000 a year
per child younger than age 18. (Click here for
more important changes in Education IRAs.) Note
though, the contribution is not tax-deductible.
Instead, when you take out the money, you pay
no taxes on it if it's used for qualified higher
education expenses (such as tuition and fees)
before the beneficiary reaches age 30. Otherwise,
you pay taxes plus an additional 10% penalty tax.
To avoid that, you may be able to roll over the
funds to an education IRA for another child.
If you're a single parent, you can contribute
the full $2000 per year if your income is less
than $95,000. The contribution limit gradually
falls as your income climbs toward $110,000, at
which point you can't contribute to an education
IRA. For married couples filing jointly, the income
limit range spans from $160,000 to $190,000 to
$220,000.
A word of caution: By no means is an education
IRA enough to cover the cost of college. Consider
that
$2,000 a year invested over 18 years, says at
8% interest, adds up to a little more than $38,000.
"Even a state college education these days
is about $12,000 a year," Lau points out,
"and that's in today's dollars. So an education
IRA can only be a start.
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ROTH
IRA |
Named for Sen. William Roth of Delaware,
a longtime IRA advocate, the Roth IRA now
allows you to contribute up to $3,000 a
year. But those contributions are not a
tax-deductible. Income limits also come
into play. For singles, you can contribute
the full $3,000 if your income is less than
$95,000. Contributions gradually phase out
as income reaches $110,000. Similarly, the
income limits run from $160,000 to $190,000
for married couples filing jointly.
When you withdraw the money, you pay no
taxes if it's been in the account at least
five years and: (1) you are older than 59½,
or (2) you become disabled, or (3) you die
and it's paid to your beneficiary, or (4)
you use the money for a first time home
purchase ($10,000 lifetime withdrawal limit).
Also, unlike a regular IRA, which requires
you to start withdrawing, money at age 70½,
a Roth IRA has no such requirement. You
can let the money sit, while earnings grow
tax-free, for as long as you like.
You can convert funds from a regular IRA
to a Roth IRA if you adjusted gross income
doesn't exceed $100,000 for both singles
and married couples filing jointly. You
also should know that distributions are
taxed in the year you convert the funds,
but if you convert before Jan. 1, 1999,
you can spread out the taxes over four years.
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Of the new IRA changes,
"I think the biggest benefit is the
Roth IRA," Tsu says. "It's a gift
everybody should look at and take advantage
of."
Tsu likes the flexibility the Roth IRA
gives savers to work toward different goals.
For instance, a young person could save
for a first home by putting in $3,000 a
year, earning interest, and then withdrawing
a sizable tax-free sum after five years.
"You've used it for an intended purpose,"
Tsu notes, "and it was not retirement.
But that's OK."
The key, however, is to not
keep putting off saving for retirement.
Tsu doesn't think the Roth IRA poses an
undue temptation to do so.
After all, she notes,
"How often can a person be a first
time home buyer, or pay for higher education?...I
think the special purposes [under the Roth
IRA] are reasonable. I would object if you
could use it for cars or boats. That would
be misuse of funds."
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If there's a downside, Tsu says, it's that a
Roth IRA contribution can be no more than $3,000
a year. Also, annual Roth IRA and regular IRA
contributions combined can be no more than $3,000.
"So you're limited," she says, noting
that you can't depend on IRAs alone for retirement
savings. "If you have a qualified plan at
work," Tsu says, "you should explore
that. Combine that with the IRAs available."
To find out what IRA options are best for your
financial situation, talk to a financial planner
or someone at your credit union. |
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