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

58
Journal of Personal Finance
contributions to the Roth IRA are not tax deductible, distributions are free
from tax upon receipt. Another advantage which the Roth IRA enjoys over the
traditional IRA is that there are no required minimum distributions (RMD)
when the taxpayer turns 70 ½.
The dollar limitations on contributions to a Roth IRA are the same as
for contributions to a traditional IRA – namely, the lesser of $4,000 ($5,000 if 50
or older) or the taxpayer’s compensation. However, there is no age limit on the
ability to make contributions to a Roth IRA so taxpayers can continue to make
these non-deductible contributions even after they turn 70 ½. Furthermore,
whether the taxpayer or the taxpayer’s spouse is already covered by an
employer retirement plan is irrelevant. Nevertheless, the allowable contribution
to a Roth IRA can still be phased out depending on the taxpayer’s MAGI.
For 2007, the contribution limit for single and married taxpayers filing separately
who live apart is reduced when MAGI exceeds $99,000 ($101,000 in
2008) and is completely phased out after $114,000 ($116,000 in 2008). The
contribution limit for married filing jointly and qualifying widow(er) taxpayers
begins to be phased out at $156,000 of MAGI ($159,000 in 2008) and is
completely eliminated when MAGI reaches $166,000 in 2007 or $169,000 in
2008. The contribution for a taxpayer who is married, filing separately but
living with his/her spouse at any time during the year, is reduced when MAGI
exceeds $0, and completely eliminated when MAGI reaches $10,000.
It is important to note that the $4,000 limitation ($5,000 if 50 or older)
in 2007 and the $5,000 ($6,000 if 50 or older) limitation in 2008 and years
thereafter on contributions applies to all IRAs in aggregate. In other words, a
taxpayer can have as many Traditional and/or Roth IRAs as he/she wants but
the total contributions to all of the IRAs cannot exceed the lesser of $4,000/
$5,000 or the taxpayer’s earned compensation for the year.
Conclusion
In a recent survey, 70% of Americans fear that they will not have
enough money to live on in retirement (Employee Benefit Research Institute &
Matthew Greenwald & Associates, 2007; Serra, 2007). While they may realize
that they will not be able to live comfortably on their social security benefits
alone and, consequently, will need to save for their retirement, many have not
been taking adequate steps to do so. Slightly over 50% of full-time employees
are covered by some company-sponsored retirement plan; however, only 46%
take advantage of those plans. Furthermore, fewer than 50% are using IRAs to
make up the expected short-fall once they stop working (Munnell & Perun,
2006). It is in light of this serious gap between perception and action that
Congress passed the PPA of 2006.
While a primary objective of the PPA was to address issues surrounding
the under-funding of traditional defined benefit pension plans, the
©2008, IARFC All rights of reproduction in any form reserved.