Most popular and most overlooked adjustments:
An IRA is a personal savings plan that offers you tax advantages to set aside money for your retirement. There are two types of IRAs – traditional IRAs and Roth IRAs. Contributions to traditional IRAs are fully or partially deductible depending on your income and whether or not you are covered by your employer’s retirement plan, such as a 401(k).
Generally, amounts in your traditional IRA, including earnings and gains, are not taxed until they are distributed. Contributions to a Roth IRA are not deductible and qualified withdrawals from a Roth IRA are not taxable.
For 2006, the contribution limit to a traditional IRA and/or a Roth IRA is the lesser of $4,000 or the amount of taxable compensation for each taxpayer. There is a special "catch up" provision for taxpayers age 50 or over who may contribute an additional $1,000.
If covered by an employer retirement plan, the phase out amounts for deducting contributions to a traditional IRA have increased for 2006. The amounts are based on filing status and modified adjusted gross income. No deduction is allowed after exceeding the maximum modified adjusted gross income.
- $75,000 - $85,000 for married persons filing jointly and qualifying widow(er) s.
- $50,000 - $60,000 for persons filing single and head of household
- 0 - $10,000 for married persons filing separate.
The contribution limit for all IRAs is $4,000 per individual plus an additional $1,000 if you are age 50 or over on December 31, 2006.
If you are not covered by an employer plan, your IRA contribution is fully deductible with no income limitation. If either you or your spouse is covered by an employer retirement fund, you may be entitled to only a partial deduction or no deduction at all, depending on your income and your filing status.
You are allowed to contribute up to $4,000 (plus an additional $1,000 if you are age 50 or over) to a Roth IRA, but no deduction from your income is allowed. Contributions to a Roth IRA are reduced when your modified adjusted gross income (MAGI) reaches $95,000 ($150,000 if married filing jointly) and are eliminated when reaching $110,000 ($160,000 if married filing jointly).
If married filling separately and lived with spouse at any time during the year, then the contributions are limited for the MAGI starting at $0 and eliminated when reaching $10,000.
Unlike a traditional IRA, contributions to a Roth IRA can be made after age 70.
RETIREMENT SAVINGS CONTRIBUTION CREDIT
You may be able to claim a tax credit for a percentage of your qualified retirement savings contributions, such as contributions to your traditional or Roth IRA. The credit is subject to phase out amounts depending on your filing status and adjusted gross income.
CONVERTING A TRADITIONAL IRA TO A ROTH IRA
If you are not married filing separately, and your modified adjusted gross income (MAGI) is $100,000 or less, you can convert a traditional IRA to a Roth IRA. You must pay taxes on all the distribution that you convert except for any nondeductible contributions you may have made to your traditional IRA.
WITHDRAWALS FROM TRADITIONAL IRAS
Generally, if you are under age 59 1/2, you must pay a 10% additional tax on money you withdraw from your traditional IRA. This tax is in addition to any regular income tax you are paying on the withdrawal that is included in your income.
There are several exceptions to the age 59 1/2 rule. You may not have to pay the 10% additional tax if, for example:
- You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- You use the distribution to buy, build or rebuild a first home.
If you are the owner of a traditional IRA, by April 1 of the year following the year you reach 70 1/2, you must either withdraw the entire balance in your IRA or start receiving periodic distributions.
WITHDRAWALS FROM ROTH IRAS
You are not required to take distributions from your Roth IRA at any age. Qualified distributions from your Roth IRA are not included in your income. A qualified distribution is one made after the Roth IRA has been established for 5 tax years and:
- Made on or after the date you reach 59 1/2
- Made because you are disabled
- Made to pay up to $10,000 (lifetime limit) of certain qualified first-time homebuyer amounts.
Traditional IRA Contributions
Saving for Education
Student Loan Interest