HIGHLIGHTS OF AN IRA

(Make sure you check for new limits- some are outdated here but the otehr basics still apply

·A IRA can be established by most individuals below age 70 1/2 who have earned income, and they can contribute up to $2000 per year into an IRA if the earned income is at least equal to the amount contributed. All, some or none of that $2000 may be tax deductible.

· A full $2000 DEDUCTIBLE contribution per person is available for each working couple if joint income is below $63,000 and below $32,000 for single filers. Partial deductibility is available for married persons with couple's incomes between $52,001 and $61,999, and partial deductibilility is available for single filers with income between $32,001 and $41,999.

In other words, if you are doing MFJ with an income of $57,000, you can both have a $2,000 IRA, but only $1,000 of each is deductible. Hence a $4,000 total with $2,000 as a deduction and the other $2,000 as non deductible IRA's.

· A deductible IRA CANNOT be established by individuals who participate in various company, agency or not for profit retirement plans: SEP IRAs, SIMPLE IRAs, 401Ks, 403Bs, 457 plans, Deferred Compensation Plans, ect., unless their income is below $32,000 for individuals, and below $52,000 for married couples.

· An individual who is not active in a company plan, but whose spouse is active, may make a DEDUCTIBLE contribution to an IRA, if their income is below $150,000.

· Dividends, interest and capital gain growth within an IRA are NOT TAXABLE and monies eventually removed are TAXABLE as ordinary income. Withdrawals prior to age 59 1/2 may be subject to taxes, and a 10% IRS PENALTY.

· Avoidance of 10% IRS penalty (but not taxes) on withdrawals prior to age 59 1/2 is available if owner takes substantially equal periodic payments over his/her life expectancy based on IRS life expectancy tables. You need to do this for at least five years. You may then switch to a better method after the 5 years and attainment of age 59 1/2+.

· Distributions- withdrawals are required starting after owner turns 70 1/2. 50% penalty for non compliance

· One can withdraw a lifetime maximum of $10,000 (contributions and earnings) without taxes or penalties for a first time home purchase.

· Withdrawals from traditional IRAs can be made for higher educational expense without penalty.

· Various investment choices for funds available.

HIGHLIGHTS OF A ROTH IRA

·Available as of January 1998.

· A Roth IRA can be established by most individuals regardless of age who have earned income below a certain specified threshold.

· A Roth IRA can be established by individuals who participate in various company, agency or not for profit retirement plans: SEP IRAs, SIMPLE IRAs, 401Ks, 403Bs, 457plans etc.

· Up to $2000 per year per participant can be contributed to a Roth IRA if the earned income is at least equal to the amount contributed.

· No Contribution is allowed when modified family annual gross income reaches $160,000 or more per year for married couples and $110,000 or more for single filers.

· A full $2000 NON DEDUCTIBLE contribution is available for each working couple if joint income is below $150,000 and below $95,000 for single filers

· Dividends, interest and capital gain growth within a ROTH IRA is NOT TAXABLE and monies eventually removed are TAX FREE if account is owned at least 5 years and owner is over 59 1/2.

· Unlike Traditional IRAs there are no minimum distributions and withdrawal requirements after age 70 1/2

· At any age, after the account is opened 5 years one can withdraw a lifetime maximum of $10,000 (contributions and earnings) without taxes or penalties for a first time home purchase.

· At any age, for any reason one can withdraw the amount(s) contributed (NOT EARNINGS) without tax or penalties.

· Various investment choices for funds available.

HIGHLIGHTS OF ROTH IRA CONVERSION

·Available as of January 1998. Many traditional IRA investors have the option to convert their Regular IRAs to a Roth IRA.

· Deductible Regular IRAs offer investors a taxable-deductible contribution on funds going into a Regular IRA, tax deferred growth on all earnings while in a Regular IRA and taxable income when distributions are taken from a Regular IRA; whereas, ROTH IRAs offer investors a non-deductible contribution going into a ROTH IRA, tax deferred growth while in a ROTH IRA and TAX FREE income when distributions are taken from a ROTH IRA under certain conditions.

· Withdrawals from ROTH IRAs are tax free if account opened at least five (5) years and owner is over 59 1/2. At any age, after the account is opened 5 years one can withdraw a lifetime maximum of $10,000 (contributions and earnings) without taxes or penalties for a first time home purchase for account owner or others. At any age, after the account is opened 5 years for any reason one can withdraw the amount(s) contributed (NOT EARNINGS) without tax or penalties from a ROTH IRA.

· Unlike Regular IRAs, there is no requirement to ever withdraw from a ROTH IRA, hence these accounts can be held until death and passed on to spouses, children or other heirs on a tax free basis.

· No conversion from a Regular IRA to a ROTH IRA is allowed when modified annual gross income reaches $100,000 (married couples filing jointly and single filers) or more per year during the year in which the conversion takes place.

· At any age, up to $2000 per year per participant can be contributed to a Roth IRA if the earned income is at least equal to the amount contributed and is only available for each working couple if joint yearly income is below $150,000 and below $95,000 for single filers.

· The full or partial amount of money converted from a Regular IRA to a ROTH IRA will be included in your taxable income in the year you convert. For 1998 ONLY, these taxes due can be spread on a pro-rata basis over the next for years.

· Taxes due on conversion must come from outside funds, since a withdrawal cannot be made from a ROTH IRA to pay the taxes.

The exceptions to the 10% early withdrawal penalty for IRA's are:

You need the money to pay for significant, unreimbursed qualifying medical expenses (for details see IRS Publication 590)

You need the money to pay for medical insurance premiums after losing your job

You become disabled

You die, and your beneficiary takes a distribution

You take the payments as an annuity, that is, a series of substantially equal payments over your lifetime or your life expectancy

You use the money to pay for qualified higher education expenses

You use the money to pay certain qualified first-time homebuyer amounts

You roll the money over into another IRA within 60 days

IRA distributions and estate disclaimers: (Frank Armstrong)  

The uniform credit exemption amounts increase and marginal estate tax rates decrease in increments until they’re repealed in 2010, only to be reinstated the following year. So, projecting tax liabilities or designing a comprehensive strategy to minimize them is dauntingly complex for larger estates. (I disagree- Congress will even out the exemptions well before 2010.)

The onerous provisions of the previous IRA and pension distribution rules were greatly simplified and liberalized. New proposed IRS regulations benefit all taxpayers with significant pension or IRA holdings.

The new rules

Some of the IRA proposed regulations will provide larger estates with additional flexibility to meet the challenge of estate planning under the 2001 tax act:

Required minimum distributions (RMDs) at the required beginning date (RBD) - the smallest amount that must be withdrawn from the account starting on a specific date - are no longer tied to the beneficiary’s age. Unless the beneficiary is a spouse, and that spouse is at least 10 years younger than the owner, a single uniform table can now be used to determine the distribution amount.

Beneficiaries can be changed at the will of the owner either before or after the RBD without requiring a change in the distribution.

When the owner dies, the estate does not need to identify the beneficiaries until the end of the year following death. (All the beneficiaries must be selected from those the owner appointed.)

When the beneficiaries inherit the IRA, they can choose to spread required distributions over their remaining lifetimes.

Under the old rules, the beneficiary had to be identified and could not be changed at the RBD, a nightmare for planners. For instance, if a wife died before her husband and after the RBD, the required minimum distributions could not be recalculated. Then, when the IRA owner died, if the life expectancy of the spouse had been re-calculated, the entire amount of the fund might have to be distributed and taxed. That would create a tax disaster for the family.

Allowing IRA and pension beneficiaries to be identified after death opens up more estate planning opportunities. For instance, if a beneficiary is replaced during life, dies before the end of the year after the fund owner’s death, or if a beneficiary disclaims his or her rights to inherit the funds, the benefits then go to the remaining beneficiary (or beneficiaries). In effect, the beneficiary is determined after death.

How it works

Let’s assume that John and Mary have a large estate that includes a $1 million IRA. John is 72 and has begun to take required minimum distributions. John names Mary as his beneficiary for the IRA. The contingent beneficiaries are their two children; their grandchildren are named as an additional set of contingent beneficiaries.

When John dies in the year 2003, Mary sees no need for those funds because she has plenty of other assets. She realizes that if she takes the IRA, it will be subject to estate tax in her estate. The two children are both employed and don’t need the funds, either. Mary and her children all file disclaimers in writing within nine months of John’s death. Because the first two sets of beneficiaries filed timely disclaimers, the estate recognizes the grandchildren as the IRA beneficiaries.

The results:

The disclaimed IRA falls within the uniform credit amount for that year, and thus is not subject to estate tax in John’s estate.

Mary could receive the rest of the estate free of estate tax under the unlimited marital deduction.

Because she disclaimed all rights to the IRA, it bypasses her estate when she dies.

For the same reason, the disclaimer by her children is not a taxable event. So, the IRA bypasses their estate, too.

The IRA is divided into equal shares for the grandchildren. The grandchildren may elect to withdraw the funds from the IRA over their remaining life expectancy.

The bottom line is that John’s IRA bypassed two generations of estate tax and could continue to grow mostly tax-deferred for an additional 60 years for the benefit of the grandchildren. (We are presuming here that it falls within the generation-skipping transfer rules.) The additional economic benefit for the family is huge.

It’s worth noting that Mary need not disclaim the entire amount of the IRA. She could disclaim only the amount that qualifies under the uniform credit amount, whatever that happens to be during year of death. Or, she could disclaim any arbitrary amount that otherwise meets her needs. The balance goes to the remaining beneficiaries.

IRA: (401(K) Cafe Traditional IRA Limits (2003)

Anyone may contribute to an IRA; the question is whether the contribution is tax-deductible. For many folks who participate in a retirement plan at work, it is not. The reason is that your ability to deduct a traditional IRA contribution depends on two factors:

whether you were an active participant in a retirement savings plan, such as a 401(k), 403(b) or 457(b) plan, at work

your modified adjusted gross income (MAGI) and filing status. (IRS Publication 590, Individual Retirement Arrangements (IRAs) contains a worksheet you can use to calculate your MAGI.)

Even if you only contribute one dollar, or if your employer makes a contribution on your behalf, you are considered a participant in the plan and your ability to make a tax-deductible IRA contribution depends on your income and filing status.

You may make a fully deductible traditional IRA contribution if you:

file as single, or head of household, and are not covered by a plan at work, or

file as married filing jointly and neither you nor your spouse are active participants in a plan at work.

Your W-2 should show if you were covered by a plan. If you are unsure, check with your employer.

The 2003 limits for taxpayers who are single or married filing jointly are $6,000 dollars higher than the 2002 limits. Here's how the new limits work:

If you participate in a defined contribution plan at work, your traditional IRA contribution will be fully deductible if you are:

Single with a MAGI less than $40,000;

Married filing jointly with a MAGI less than $60,000; or

Married filing separately and have no MAGI.

If you participate in a plan at work, your traditional IRA contribution will not be deductible at all if you are:

Single with a MAGI of $50,000 or greater;

Married filing jointly with a MAGI of $70,000 or greater; or

Married filing separately with a MAGI of $10,000 or greater.

If you participate in a plan at work, your traditional IRA contribution will be partially deductible if you are:

Single with a MAGI of $40,000 to $49,999

Married filing jointly with a MAGI of $60,000 to $69,999; or

Married filing separately with a MAGI between $0 and $9,999.

(IRS Publication 590 contains a worksheet you can use to calculate what portion of your contribution is deductible.)

So, if you are single and have a MAGI of $39,000 in 2003, you will be able to fully deduct a traditional IRA contribution of $3,000 from your taxable income. If your status is married filing jointly, and you have a MAGI of $68,000, you can only deduct a portion of a traditional IRA contribution.

If one spouse is covered by a retirement plan at work, but the other isn't, higher limits apply to the spouse who isn't covered if the couple is married filing jointly. These limits are the same in 2003 as they were in 2002, and are as follows:

MAGI of $149,999 or less - the traditional IRA contribution for the non-covered spouse is fully deductible

MAGI of $150,000 to $159,999 -- the traditional IRA contribution for the non-covered spouse is partially deductible

MAGI of $160,000 or more -- the traditional IRA contribution for the non-covered spouse is not deductible.

INHERITED IRAS – (2006) Many people believe that at the death of an IRA owner, the beneficiary must liquidate the IRA within five years of the owner's death. However, you can also make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary..."Joe Smith IRA (deceased May 10, 2006), F/B/O (for the benefit of) Pat Smith, beneficiary." The beneficiary will still have to begin receiving distributions from the inherited IRA according to the "other than spouse" rules...essentially withdrawing the entire balance by the end of the fifth year following the owner's death or begin receiving distributions spread out over the beneficiary's lifetime. If desired, the trustee-to-trustee transfer does, however, offer an opportunity to move the funds from one financial institution to another.

• IRA types, by family ownership and assets: (2006)

By ownership, the most commonly owned IRA was the

------regular IRA (44.6 percent of the family heads who owned an IRA owned only that type),

------followed by the rollover IRA (18 percent) and the

------Roth IRA (15.9 percent).

By assets,

------the regular IRA-only type held 33.4 per-cent of all family financial assets,

------followed by regular and rollover IRAs combined (26.6 percent),

------rollover-only IRAs (24.2 percent), and

------Roth IRAs (4.0 percent of assets).