Unraveling The Process of IRA Participation and Deductibility
IRA participation and deductibility is likely the most simple, yet confusing item on your tax return. Here’s a general guide you can use to help you address the process surrounding IRAs.
First, if you are single and your adjusted gross income (AGI) is less than $33,000 and you desire a tax deduction, you may make a fully-deductible contribution of $3,000 to an individual retirement account (IRA) in your name. This represents an increase over last year’s $2,000 maximum.
If you are married, the adjusted gross income limitation for deductibility begins at $53,000. Tax deductions are phased out completely for single and married taxpayers with adjusted gross incomes of $43,000 and $63,000, respectively.
Thus, if your income exceeds $43,000 (single) or $63,000 (joint) or a deduction is not as important to you as your desire for tax-exempt retirement savings, you should consider a Roth IRA. Contributions are nondeductible; however, all your earnings will grow free from taxation. Penalties and taxes may still apply for nonqualified withdrawals of earnings prior to age 59; however, your original contributions may be withdrawn at any time for any reason without penalty or taxation. Maximum annual contribution limits for Roth IRAs were also increased to $3,000 for 2002.
Finally, at adjusted gross income levels greater than $110,000 for single and $160,000 for married taxpayers filing jointly, you cannot use a Roth IRA; however, you still may contribute to a traditional IRA. While your contributions may not be deductible, you still will receive the benefits of tax-deferred growth, self-direction, and a virtually unlimited selection of investments.
Beginning in 2002, individuals ages 50 and older may make an additional $500 contribution ($3,500 total) to their IRAs.
There are exceptions to these rules and many other changes are included in the new tax law, so please consult with your advisor for changes that may uniquely benefit your individual situation.
Do you like what you read? Subscribe to Hawaii Business Magazine »
Hawaii Business magazine invites you to comment on our articles and the issues they raise. Comments are moderated for offensive language, commercial messages and off-topic posts and may be deleted. Some comments may be chosen for inclusion in the magazine on the Feedback page.