NOVEMBER 2007 VOLUME 1, NUMBER 2
Individual Retirement Accounts
& Tax, Inc.
Your Hometown An Individual Retirement Account (IRA) is a personal savings account that provides
income tax benefits to people saving for their retirement. The huge benefit of an
Kellie Becket, CPA
IRA is that it allows you to compound interest and save taxes. You invest your
money in an IRA up to an allowable amount each year. Your investment in the IRA
www.beckettax.com is called a contribution. Your contribution may or may not be deductible for tax
purposes depending on your circumstances. This will be discussed later. The
earnings on your IRA grow tax free until the time you draw them out of the account.
60555 This is called a distribution. At that time, you may be taxed on the distribution, but
since your income is likely to be less once you retire, you may be taxed at a lower
There are five different types of IRA’s available; the traditional IRA, the Roth IRA,
(630) 393-9054 the Education IRA, the SIMPLE IRA, and the SEP IRA.
The SIMPLE IRA and the SEP IRA are established by small businesses for the benefit
of their employees.
Office hours: An Education IRA is a savings plan for higher education. Parents are allowed to
Mon-Fri 3:30 – 8:30 make nondeductible contributions to an Education IRA for a child under the age of
Sat & Sun 12 – 4
In 2007 you can contribute up to $4,000 into your IRA if you have earned income of
at least this amount. If you are 50 years old or older you are allowed a catch-up
contribution of $1,000 for a total contribution for the year of $5,000. Once again
you have to have at least $5,000 of earned income to be able to contribute $5,000
in your IRA. In 2008 the contribution amount increases to $5,000 while the catch-
up amount remains at $1,000.
Your contributions into a traditional IRA range from being fully deductible to fully
non-deductible and anywhere in between. How much of your IRA that is deductible
depends mostly on the amount of taxable compensation you earn and whether or
not you are an active participant in a qualified plan. In 2007, if you are not an
active participant in a qualified plan, you can deduct your IRA contribution no
matter how high your compensation. If you are an active participant in a qualified
plan and are married, filing jointly, you can deduct your contribution if your earned
Tax Talk topic:
income is less than $80,000. If it is more than $80,000 and less than $100,000
your deduction is slowly phased out. If your compensation exceeds $100,000 you
Tax changes and
Year-end tax planning cannot deduct your IRA contribution at all. The amount between $80,000 and
$100.000 is called a phase out. The phase out amount for a single taxpayer is
between $50,000 and $60,000. The earnings of a traditional IRA are tax-deferred.
This means you will not pay tax on the earnings until they are distributed to you.
Of course you have to follow the rules so that you are not penalized. The purpose
Check out this site! of an IRA is to help you save for your retirement. To that effect, the IRS has put
penalties in place to discourage you from taking the money out too soon. If you
withdraw the monies before you reach the age of 59½ years old, you will be
assessed a 10% penalty on the amount of the distribution unless an exception
applies. This is called a premature distribution.
On the other side of the coin, the IRS doesn’t want you to keep your money in the
IRA account for too long of a period. It wants to make sure that you eventually do
pay tax on this deferred money. To that end, you are required to start taking a
minimum distribution from your IRA by April 1st of the year following the year you
turn 70½. If you don’t, you will face a penalty of 50% of the difference between
the “required minimum distribution” and the amount you actually took. The rules
governing RMD’s are very complex and you should not attempt to calculate the
amount on your own.
Under a Roth IRA, the contributions are NEVER deductible. The earnings
accumulate tax-free and remain tax-free upon distribution. The contribution limits
If you would like to are the same as that for a Traditional IRA; $4,000 and a $1,000 catch-up
see a particular tax contribution. It doesn’t matter whether you are an active participant in a qualified
topic in a future plan or not. You can contribute as long as your income levels are below a set
edition of Tax Talk amount. In 2007, your income must be under $99,000 for singles and $156,000 for
please email your married couples. You cannot withdraw the funds within the first 5 years of opening
request to a Roth IRA without being assessed a penalty. But once the 5 years have passed,
you can withdraw your contributions tax and penalty free. There are no required
minimum distribution rules as there are with the Traditional IRA.
Which one is best???
If you qualify for both a deductible IRA and a Roth IRA you would probably want to
chose a Roth IRA if you expect to be in a higher tax bracket at retirement than you
are right now. (Think high school student or someone just starting their career).
If you expect to be in a lower tax bracket at retirement than you are currently, you
may want to consider a traditional deductible IRA.
If you do not qualify for a deductible IRA, but you do qualify for a Roth contribution,
chose a Roth IRA over a non-deductible IRA. Remember, the earnings of a
traditional IRA are tax-deferred but the earnings of a Roth IRA are TAX-EXEMPT.
If you do not qualify for either a deductible IRA or a Roth IRA you should chose a
non-deductible IRA over simply investing your money in a savings vehicle. The
earnings will grow tax free until distribution. In 2010 there will be a onetime option
for higher income taxpayers to convert their IRA’s to a Roth IRA. You will have to
pay tax on the earnings and any deductible contribution you made at the time of
conversion but from there on out, the earnings accumulates tax free.
Before deciding which type of IRA is best for you, you should take the time to work
the numbers through, taking into consideration the tax you will save now versus the
tax you may save at retirement. I can help you make this determination. Please
call me if you want to discuss your options.