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									Individual Retirement
Accounts
(IRAs)
MontGuide 199807

                   Revised 2004
Marsha A. Goetting
 MSU Extension Family
 Economics Specialist
     P. O. Box 172800
  Montana State University
   Bozeman, MT 59717
       406-994-5695
  6 MontGuides
1. Individual Retirement Accounts
2. Shopping for an IRA
3. Withdrawals from IRAs
    When owner is under 59 ½
    When owner is between 59 ½ & 70 ½; turns
     70 ½
4. Inheriting an IRA: Planning techniques
    Primary beneficiaries
    Successor beneficiaries
Individual
Retirement
Accounts
• www.montana.edu
• Search:
  • Individual Retirement Accounts
IRA Tax Law
Changes
• Economic Growth
  & Tax Relief
  Reconciliation Act
  of 2001
    Purpose of IRAs
•    Encourage Americans
    to save for retirement
Question #1
• What President & in
 what year were IRAs
 originally proposed?
Answer: #1
• Nixon
• 1971
Authorization
• Employee Retirement
  Income Security Act
  (ERISA)
  1974
  Workers not covered by
   employer pension plans
Question #2
• What % of households
  owned IRAs as of mid-
  2003?
Answer: #2
• Percent of households
  having IRAs mid 2003?
  41.4% (31.4% 2001)
   • 45.2 million
Total IRA Assets
• $2.3 Trillion (2002)
• Represents 23% of $10.2
  trillion retirement
  market
2 Basic Types of IRAs
1. Traditional          2004
  Tax Deductible
  Non-tax Deductible
2. Roth
Traditional IRAs
• Tax Deductible
 contribution
  Up to $3,000
  annually
Table 1: IRA
Contributions
    Year Limit       Over 50   Total
     2004   $3,000     $500    $3,500
     2005   $4,000     $500    $4,500
     2006   $4,000    $1,000   $5,000
     2007   $4,000    $1,000   $5,000
     2008   $5,000    $1,000   $6,000
Contribution limits
• After 2008 indexed
 for inflation
  Increments of
   $500
Who???
• Under age 70 ½
• Earned Income
 Earned Income
• Wages, salaries, tips, &
  Commissions
• Taxable alimony
• Professional fees & bonuses
• Other compensation for
  personal services
Un-Earned Income
• Earnings & profits from
   property
   Rental
   Interest income
   Dividend income
• Social Security
• Pension or annuity income
Un-Earned Income
• Social Security
• Pension income
• Annuity income
Spouse
     • What if
      he/she is not
      employed?
Spousal IRAs
    •   Up to $3,000
    • Joint federal income
      tax return must be
        filed
 Tax Deductible?
1. Active participant in
   employer retirement plan
2. Income level
3. Filing status
Employer Plan
• Covered or not?
• Box checked
 W-2 Wage & Tax
  Statement
Tax Deductible?
• If not active participant in
 employer retirement plan:
 IRA is fully tax deductible
   • (Regardless of income)
 Tax Deductible?
• If active participant in
 employer retirement plan:
  IRA may not be fully
  deductible
Modified adjusted gross
income--Table 2, page 2
Year   Single (partial)   Married (partial)
2004   $45,000-$55,000     $65,000-$75,000
2005   $50,000-$60,000     $70,000-$80,000
2006   $50,000-$60,000     $75,000-$85,000
2007   $50,000-$60,000 $80,000-$100,000
Partial tax deduction
IRA calculation
• IRS publication 590
   Tables & worksheets
   1-800-829-3676
   www.irs.ustreas.gov
Deferral of income
tax
• IRA contribution deducted
  from income
 Montana
 Federal
Married Couple
under age 50
• Income    $35,000
• IRAs       - 6,000
• Taxable   $29,000
Married Couple $35,000

•   Tax Brackets
     Montana = 9%
     • ($31,1000-$44,500)
     Federal = 15%
      ($14,000 -$56,800)
Married Couple
Income ($35,000)
• $6,000 his & her IRAs
  x .24 (state & federal)
  $1,440 “saved/deferred” in taxes
  by each contributing to IRA
Married Couple

• Deposit     $6,000
• Tax savings - 1,440
• Real cost $4,560
Married Couple
                    NO IRA       IRA
Income             $35,000   $35,000
Taxable Income
                   $35,000   $29,000
State & Fed Tax
                    $4,550    $3,650
After tax income
                   $30,450   $25,350
Savings
                    $6,000
$ Family living
                   $24,450   $25,350
IRA benefit
• Deferral of
  taxation
  On deposits
  On earnings
Retirement
Saver’s Tax Credit
• Lower incomes       IRA
                  Saver’s Tax
• Page 5            Credit

  Table 3
Retirement Saver’s
Tax Credit
• Credit on first $2,000
 of contribution
  Phases out as income
  increases
Retirement Saver’s Tax
Credit Example--Single
• Income $15,001-$16,250
• IRA deposit $2,000
• Percent credit = .20
• Tax credit = $400
Can I roll over
withdrawals from my tax
deferred retirement
Plan to my IRA?
• Yes, a “conduit” IRA is
 recommended
“Conduit” IRA
• Allows an individual to
 later transfer funds
 to new employer’s
 plan
Rollovers
•   45% had
    traditional IRAs
     That included assets rolled
     over from employer-
     sponsored retirement plans
Can I roll over my
traditional IRA into my
tax deferred retirement
plan?
• Yes, plan must be
 “qualified”
Question #3
• What is the median
 balance in traditional
 IRAs…mid 2003?
Answer: #3
• Median balance in
 traditional IRAs mid
 2003?
  $30,000
   $27,000 in 2001
Types of IRAs
                        2004
• Traditional
 Tax Deductible
  Non-tax Deductible
• Roth
Non Tax Deductible
IRA
• For individuals who are covered
  by an employer retirement plan
• Income exceeds deductible IRA
  limits
• Not eligible for Roth IRA
Non Tax-Deductible
IRA
• Contribute
  tax-paid dollars
  Taxes on earnings
  deferred until withdrawal
Recommendation:
• Keep tax-deductible &
 non-tax deductible
 accounts separate
Non Tax
Deductible IRA
• Attach form
  8606 to tax
  returns
Non Tax Deductible
IRA--Withdrawals
• Worksheet 1-1
• IRS Pub 590 to
 determine how much
 tax free & taxable
Types of IRAs
• Traditional          2004
 Tax Deductible
 Non-tax Deductible
• Roth
Roth IRA
    • $3,000
     Annually
    • After tax
     dollars
Table 1: Roth IRA
 Year Limit       Over 50   Total
  2004   $3,000     $500    $3,500
  2005   $4,000     $500    $4,500
  2006   $4,000    $1,000   $5,000
  2007   $4,000    $1,000   $5,000
  2008   $5,000    $1,000   $6,000
Roth
Eligibility
• Single persons
  Income up to $95,000
• Married couples
  Income up to $150,000
 Roth IRA partial
 contributions
• Single persons
  $95,000 - $110,000
• Married couples
  $150,000 - $160,000
Partial tax deduction
IRA calculation
• IRS publication 590
  Tables & worksheets
  1-800-829-3676
  www.irs.ustreas.gov
No Roth
• Single persons
  Income above $110,000
• Married couples
  Income above $160,000
Question #4
•   What % of
    households owned a
    Roth IRA as of
    mid-2003?
Answer #4
•   Roth IRA mid 2003
     14.6%
     16 million
Roth IRA
Contributions
• Can be made past age
 70 ½
   If you have earned income
 Roth Withdrawals
• Subject to 10% excise
 tax unless:
    Account is 5 years
    old
    Owner age 59 ½
Roth IRA
• Withdrawals tax-free
• Includes all
  accumulated earnings
  tax-free
Roth - Married
• From age 25 to 65
• Deposited $6,000
 annually
• Earn 5%
Roth IRA-Age 65
 $724,799 Balance
-$240,000 Deposits
 $484,799 Tax-free
 Earnings
Question #5
•   What is the median
    balance in Roth IRAs
     ……..mid 2003?
Answer: #5
• Median balance in
 Roth IRAs mid 2003?
  $18,400
Roth IRA vs
Traditional
• Utilize computer
 analyses in Web sites
Question #6
• What % of Roth
 IRAs were funded by
 conversion from
 Traditional IRA?
Answer: #6
• % of Roth IRAs formed
  from conversion?
  33%
Individual Retirement
Accounts
(IRAs)
MontGuide 199807

                   Revised 2004

								
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