During the tax preparation process we are often asked questions that have to do with the timing of contributions, the most appropriate account, and the deductibility of contributions. So we’ve put together a list of FAQs (Frequently Asked Questions). We hope that you find the answers you need. What are the new maximum 2003 contribution amounts for each of the various retirement accounts? We’ve provided a table for easier reading.
What is the “catch up” amount?
Congress has written new tax law that allows people over the age of 49 to make additional contributions to their retirement accounts. The amount of the catch up contribution varies according to the type of plan. You can see those amounts in the table below.
When is the best time of the year to make my IRA contribution?
The earlier in the year the better. Tax deferral starts the moment you put your contribution into the account. Your 2003 IRA contribution can be deposited as early as January 1, 2003.
What happens if I prefer to make a Roth IRA contribution but find out when I file my tax return that I am not eligible for a Roth IRA?
You can make the Roth IRA contribution early in the year. If you find that the contribution is not allowed because your income is too high, then you can remove the contribution with the earnings by the time your income tax return is due (April 15) without a problem. Only the investment earnings will be taxable.
In what order should I fund my retirement accounts?
We’ve listed them in order of preference. Generally, you should contribute to your employer’s plan, 401(k) or 403(b), especially if your employer matches any of your contribution. The employer match is extra compensation to you. If your total income allows, you should make aRoth IRA contribution. Remember, the Roth IRA contribution is not deductible, so there are no immediate tax benefits. However, the earnings in the Roth IRA are NEVER taxed and the Roth IRA does not require you to make minimum distributions at age 701�2. Roth IRAs make wonderful inheritances for your children, since they can continue to enjoy the tax-free income from the Roth IRA over their life expectancy. If you do not qualify for a Roth IRA, then atraditional IRA contribution is the next best move. This contribution may be deductible (unlike the Roth IRA) depending on two circumstances: your total income level and whether you are covered by an employer-sponsored retirement plan.
Can I put money into an IRA for my children?
Yes, if they have a job and have received a paycheck, you can put up to the maximum $3,000 or their earned income, whichever is less.
If my spouse is not receiving a paycheck, can we still make an IRA contribution to his/her account?
Yes. You are permitted to put up to the maximum amount allowable ($3,000 or $3,500 with “catch up”) as long as one spouse has earned income equal to or greater than the IRA contributions you intend to make. For example, if Mrs. Howard earns $60,000 per year and Mr. Howard is not employed, then the Howards can each make a $3,000 contribution to their IRA, for a total of $6,000 in contributions, since Mrs. Howard makes more than $6,000.
Please call us if you have more questions about contributions to retirement plans or IRAs. And, once you’ve read our newsletter, please feel free to pass it along to a friend.