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Solutions to common IRA questions

Over the years, Congress has rewritten the rules on Individual Retirement Accounts (IRAs), hoping to encourage individuals and families to save more for retirement.

But these adjustments, along with the introduction of the Roth IRA several years ago, has left many people with questions about their eligibility and how much they are entitled to contribute.

Here are the answers to some common IRA questions:

When do I contribute?

With both traditional and Roth IRAs, you can make contributions up to the deadline for filing your federal income tax return — not including extensions.

How much can I contribute?

For 2004, you can contribute up to $3,000. For 2005 through 2007 the maximum contribution will be $4,000; in 2008, it will be $5,000.

Starting in 2009, maximums will be adjusted annually for inflation in $500 increments. Plus, if you are age 50 or older, you are entitled to add an additional $500 “bonus” contribution to your IRA. Starting in 2006, that amount grows to $1,000 a year.

Which IRAs can I make my contributions to?

You can make contributions to an IRA, Roth IRA or both, as long as the total contribution doesn’t exceed the maximum. But you may make a contribution to a Roth IRA only if your adjusted gross income (AGI) is no more than $160,000 (married filing jointly) or $110,000 (single). Partial contributions are allowed for AGIs between $150,000 and $160,000 (married filing jointly), or between $95,000 and $110,000 (single).

What if my spouse doesn’t work?

As long as you file a joint tax return, you may set up a “spousal IRA,” and make contributions up to the maximum allowed on behalf of your spouse — even if he or she has no income from employment.

Are my contributions tax deductible?

As with most tax questions, it depends.

If you participate in a company retirement plan, you may be able to deduct contributions to a traditional IRA. It all depends upon AGI. A full deduction is allowed for your 2004 contribution when your AGI is no more than $65,000 (married filing jointly) or $45,000 (single). The deduction phases out over the next $10,000 of AGI. As with maximum allowable contributions, these limits can change from year to year; check with your tax advisor for details.

If you file a joint return and contribute to a spousal IRA, you may deduct your contributions to a spouse’s traditional IRA, even if you participate in a company plan. But you may not deduct your contributions if you and your spouse’s combined AGI is greater than $160,000. (A partial deduction is available if your AGI is between $150,000 and $160,000.)

Are my Roth IRA contributions deductible?

There’s no deduction for a Roth IRA contribution. But, remember, unlike a traditional IRA, earnings from your Roth IRA are tax free. Contributions may be withdrawn tax-free as well, if you meet specific requirements.

What’s this I’ve heard about a “sunset provision?”

The higher contribution limits for IRAs are part of the 2001 Tax Relief Act; the “sunset provision” refers to the fact that the act expires in 2010. Unless Congress acts sometime before then to eliminate this “sunset provision,” these new, larger contribution amounts will then become history.

Jeff Francis is senior vice president and senior investment officer for First Tennessee Brokerage. For more information about this or other personal finance issues, please call (865) 971-2321.


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