3433-vol. 6 issue 2-3.pmd - iarfc

Volume 6, Issue 2 & 3 57
must be included in income. Furthermore, when the taxpayer reaches the age
of 70 ½, he/she must begin to take minimum required distributions (MRD)
from his/her Traditional IRAs.
The deductibility of the IRA contribution depends on the taxpayer’s
filing status and whether the taxpayer and/or the taxpayer’s spouse are
covered by retirement plans at work. If there is no pension plan coverage, the
deduction is the lesser of $4,000 or the taxpayer’s compensation. This
increases to $5,000 in 2008 and years thereafter. Additional annual contributions
of up to $1,000 are available to taxpayers who are 50 or older. Deductible
contributions to a Traditional IRA can continue to be made until the year in
which the taxpayer turns 70 ½.
If filing a joint return, a taxpayer can use his/her spouse’s compensation
in order to satisfy the “lesser of” rule. A taxpayer can also make contributions
into a separate Traditional IRA on behalf of his/her non-working spouse.
The limits discussed above apply, with the combined contributions for both
spouses not exceeding the amount of taxable compensation reported on the
joint tax return.
If the taxpayer or the taxpayer’s spouse is covered by a retirement
plan at work, the deduction is subject to phase-outs based upon the
taxpayer’s modified adjusted gross income (MAGI). MAGI is calculated by
adding back the Traditional IRA deduction, the foreign earned income
exclusion, the foreign housing deduction or exclusion, the U.S. Savings Bond
interest exclusion, the student loan interest deduction, and any employer-paid
adoption expense exclusion to the adjusted gross income (AGI). If a taxpayer
filing as single or head of household is covered by an employer-sponsored
plan, the IRA deduction begins being phased out at MAGI of $52,000 ($53,000
in 2008) and is unavailable once MAGI reaches $62,000 ($63,000 in 2008). For
joint filers where both individuals are active participants in an employer
retirement plan, the phase-out of the deduction begins at $83,000 of MAGI
($85,000 in 2008) and is completely phased out when MAGI reaches $103,000
($105,000 in 2008). For married taxpayers filing separate returns, the phase-out
begins immediately and the deduction is unavailable once MAGI reaches
$10,000. If the taxpayer is not covered by an employer plan but his/her
spouse is, the IRA deduction is phased out when MAGI is more than $156,000
($159,000 in 2008) but less than $166,000 ($169,000 in 2008). If MAGI exceeds
the annual limit, a deduction is not permitted for contributions to a Traditional
IRA.
Planning Strategies
Roth IRA
An increasingly popular alternative to the Traditional IRA is the Roth
IRA. Unlike the Traditional IRA, contributions to a Roth IRA are not taxdeductible,
meaning it is funded with after-tax dollars. However, because