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IRA

Taxpayer asks:

What’s the maximum contribution to an IRA for 2008? What about 2009? What happens if I go over?

Taxgirl says:

Argh! Retirement plan questions are tough because they’re so fact specific. Here are the general rules as they relate to IRA contributions:

If you are under 50 years of age at the end of 2008, the maximum contribution for your traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2008. This is the limit for all IRA contributions.

If you are 50 years of age or older at the end of 2008, the maximum contribution for your traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2008. Again, this is the limit for all IRA contributions.

The IRA contribution limits for 2009 are the same as for 2008.

If contributions to your IRA are more than the limit, you can apply the excess contribution to a later year if your contributions for that later year are less than allowed. Otherwise, if you don’t take out the extra contributions by the due date for your return, you’re subject to a 6% tax. There are some tricky bits here, so exercise caution. The easiest thing to do is to plan not to overcontribute. If you do, check in with a tax professional as quickly as possible so that you can mitigate your situation.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!Now on Facebook!

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Twitter Tax Tips #17

March 31, 2009 · 0 comments

If you’re still looking for ways to minimize your tax this yr, remember that you can make contributions to your IRA thru 4/15 #TwitterTaxTip

(For more on twitter tax tips, see my prior explanatory post.)

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Just before the holidays, President Bush signed a bill that eliminated the hefty penalty for not taking the required minimum distributions (RMDs) from certain tax-deferred retirement accounts such as traditional IRAs and 401(k) plans for the year 2009.

Under the traditional rules, you must begin RMDs for traditional IRAs and 401(k) plans by April 1 of the year after you reach age 70-1/2. In other words, the April 1 that follows your 70-1/2 birthday is the first day that you must take a RMD. The amount of the RMD is calculated by your life expectancy – you can figure it out yourself using the tables from the IRS but it’s usually much easier to have your financial advisor do it (they have fancy software). This amount is recalculated each year since your life expectancy changes each year. You can always take out more than the RMD but you can’t take out less without being subject to a fairly significant penalty.

In 2009, however, you catch a break. You won’t be subject to the penalty if you choose (for whatever reason) to leave your money in your retirement account and not take the RMD. Note that this is NOT applicable to 2008, 2010, or any other year – just 2009. Congress likes to do quirky things like that.

Of course, there are some complications. If you were required to make your first RMD in 2008 and chose to push it off until the April 1, 2009 deadline for newbies, you must still take your RMD. You wouldn’t be exempt under the new rules since it’s technically a 2008 obligation.

If you turn 70-1/2 in 2009, you won’t be required to make your first RMD in 2009. You will, however, have to make a 2010 withdrawal by the end of 2010 (assuming that the rules don’t change). It’s odd, but under the new rules, the 2010 withdrawal will be considered your “second” distribution by the IRS even though it’s really your first. So you don’t get to take advantage of the “extension” through April 1, 2011 – you have to take it by the end of 2010. I know. It’s weird. But there you go.

Similarly, if you inherit an IRA and you are required to take a RMD in 2009 under the 5 year rule, you can skip 2009 – if you want to.

Remember, these rules don’t mean that you can’t take out your RMD, just that you don’t have to – and it only applies to 2009.

And one more thing: I don’t want to play financial advisor – because I’m not. But I do know a thing or two about taxes. And with changes in the rules, there are investment folks who, having taking a beating in the market over the last year, may see this as an opportunity to sell you a Roth IRA.

I think Roth IRAs can be wonderful investment vehicles under the right circumstances. Shifting tax brackets – paying lower taxes now on the Roth to avoid higher taxes later – can work to your advantage. But, in the case of many (though admittedly not all), the tax bracket for retirees remains relatively flat, so there may not be a benefit to paying now. Roth IRAs can also be good if the period of time for tax free withdrawals is significant – not always the case for retirees who have already reached age 70-1/2. It’s also not optimal if you have to pay tax on the distribution out of the funds that you’re contributing to the Roth.

So, a conversion under the new rules may be a good idea but don’t assume that it is. Be smart. Ask questions. Run numbers.

Finally, there’s been some chatter that this RMD penalty exemption may be extended past 2009. For now, it’s just chatter, so don’t count on it. As of today, the only year for which the penalty is eliminated for not taking your RMD is 2009. Traditional income tax rules as they relate to distributions still apply.

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Effective for the year 2008, some taxpayers can save for retirement and earn a special tax credit. This credit, referred to as the “saver’s credit” can offset the first $2,000 contributed to the taxpayer’s IRA, 401(k) and other retirement plans.

There is a catch. The credit is only available to taxpayers which meet certain income criteria. The credit has been available as a permanent fixture since 2006 but the income amounts are indexed each year. Currently, they are:

Singles and married filing separately with incomes up to $26,500 in 2008 ($27,750 in 2009);

Married couples filing jointly with incomes up to $53,000 in 2008 ($55,500 in 2009); and

Heads of Household with incomes up to $39,750 in 2008 ($41,625 in 2009).

The maximum saver’s credit is $1,000 for individuals, or $2,000 for married couples. The amount can be reduced by adjusted gross income (AGI), tax liability and amount contributed to your IRA or other qualifying retirement programs. The average credit paid in 2006 was $213 for married filing jointly, $149 for heads of household and $128 for singles.

To claim the credit, use form 8880 together with your 1040. There are some additional eligibility requirements, so be sure and read the instructions or consult with your tax professional (hey Robert, see, I said it).

Be sure and keep deadlines in mind… Eligible taxpayers have until April 15, 2009, to set up a new IRA or make a contribution to an existing IRA and have it *count* for 2008. However, contributions to deferral-type plans, like 401(k) plans, must be made by the end of the calendar year; those taxpayers have just 23 days to qualify for a 2008 credit.

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7 Ways to Save On Your Taxes Now.

22 August 2007

I know, I know. It’s August. Tax season is eons away. You don’t want to think about it.
But maybe you should. With some shrewd planning now, you can save thousands on your taxes come April. Consider these actions:
1. Refinance. Yes, the market is a mess right now. [...]

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Ask the Taxgirl: Rollovers

12 April 2007

Taxpayer asks:  I had a IRA from a former employer that was rolled over to a brokerage account in 2006.  While preparing for my tax appointment, I contacted the brokerage house to find out if I was due a 1099 as I hadn’t received one.  They said no.  So I went to my appointment, got [...]

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Tax Changes for 2006 (Pt 2)

7 March 2007

One of the most important tax changes for 2006 is the increase in the contribution limit for Roth and traditional IRAs rises for those taxpayers who are aged 50 or more. The increase is more than 10% from $4,500 to $5,000. But if you’re under age 50, sorry, the contribution limits remain the same.
Even [...]

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