There is Still Time to Lower Your Taxes with a Roth IRA
March 12, 2000 If you're like most people, this is about the time you start thinking about the dreaded
tax return. Up to now, you've gone about your busy life oblivious to the looming April 17, 2000 deadline. But with only about a month left to file, you're starting to fret over how much MORE taxes you may
owe and wondering how you will find the time to put together all the paperwork. Although there is no way to avoid gathering the necessary paperwork, you might be able to lower your 1999 tax liability by opening up
an IRA account. The deadline for most IRA contributions is April 17, 2000. But to avoid possible headaches don't wait until the last minute. The Roth
IRA was introduced through the Taxpayer Relief Act of 1997 and offered a "Tax Free" alternative to retirement savings rather than the traditional IRAs which offered "Tax Deferred" retirement planning. Not
surprisingly, the tax rules and regulations of the Roth IRA are very complex, but to help you gain a general understanding of this retirement tool and determine whether you can use the Roth IRA to lower your taxes, we
will address the following questions:
1) What is a Roth IRA?
A Roth IRA is an individual retirement plan that can either be an account or an annuity. At the time the account or annuity is set up, it must be designated
as a Roth IRA. Neither a SEP-IRA (Simplified Employee Pensions) nor a SIMPLE IRA (Savings Incentive Match Plan for Employees) can be designated as a Roth IRA. The key difference between a traditional IRA and
a Roth IRA is that you cannot deduct contributions to a Roth IRA, but qualified distributions are tax-free. Traditional IRAs offer you the tax deduction for qualified contributions, but withdrawals will be
taxed. Contributions can be made to your Roth IRA after you reach age 70 ½ and you can keep funds in your Roth account as long as you live. 2) Can I contribute to a Roth IRA?
In general, you can
contribute to a Roth IRA if you have taxable compensation, but your contributions may be limited based on your modified adjusted gross income (AGI). You can contribute to an IRA regardless of your age (ok for
young children and persons older than 70 ½). Employees covered by a retirement plan at work can still contribute to a Roth IRA if they qualify (i.e., 401(k), pensions, profit sharing, etc). You can also
contribute to a Roth IRA for your spouse provided the contributions fall within the spousal IRA limitations. Qualified taxable compensation includes wages, salaries, tips, professional fees, bonuses and compensation
received for rendering personal services. It also includes commissions, self-employment income, taxable alimony. It does not include income from interest, dividends, capital gains and social security.
3) How much can I contribute?
Your Roth IRA contributions are limited by these factors:
- The lesser of $2,000 or 100% of your taxable compensation
- Your modified adjusted gross income (AGI)
- Any contributions made to a traditional IRA
Generally, your total combined contributions to a traditional IRA and Roth IRA cannot exceed $2,000 or 100% of your taxable compensation. It is important to note that your Roth IRA contributions are not limited
by employer contributions made to SEP IRAs or SIMPLE IRAs. Go To Page 2
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