April 15 is Decision Time

With the April 15 tax filing deadline looming, it is decision time for one of your biggest tax decisions. April 15th is the deadline for contributing to an Individual Retirement Account for calendar year 2008. With the stock market pounded into submission, now is an excellent time to load up on stocks. You’ll need to decide if you will contribute to a deductible IRA, a non-deductible IRA or a Roth IRA. 

For 2008 the maximum contribution is 100% of your earned income or $5,000, whichever is less. If you were age 50 or older during 2008, you’re allowed an additional ‘catch-up’ contribution of $1,000 for a total of $6,000. You need a PhD in economics to follow the rules which I have attempted to simplify here:
Tax-Deductible IRA. 
  • Single/Head of Household tax filers. If you file as single or head of household taxpayer and neither participated in nor qualified to participate in an employer sponsored retirement plan during the 2008 calendar year, you are fully eligible. If you were covered by a retirement plan in 2008, the deductibility is phased out based on your adjusted gross income of between $53,000 and $63,000.
  • Married filing jointly. For couples filing jointly where one spouse was covered by a plan in 2008, the phase-out of deductibility is between $85,000 and $105,000 for the spouse covered by the plan. For the spouse not covered by the plan, the phase out is between $159,000 and $169,000.
  • Married filing separately. Phase out begins with the first dollar of AGI and you are not eligible for a contribution if your AGI is $10,000 or more.
Non-Deductible IRA
There are no eligibility requirements for this category except that you must have earned income up to the amount of your contribution and the combination of non-deductible, deductible and Roth IRA contributions cannot exceed the maximum allowable contribution of $5,000 ($6,000 for those eligible for the catch-up contribution). 
Roth IRA
With Roth IRAs, you don’t receive a tax deduction for your contributions but your money grows tax deferred and withdrawals are tax-free at retirement. 
  • Single/Head of Household tax filers. You are eligible for a full contribution if your modified adjusted gross income is under $101,000. Your eligibility to contribute is phased out ratably between $101,000 and $116,000.
  • Married filing jointly. Full contributions are allowed if your modified adjusted gross income is under $159,000. Contribution limits phase out between $159,000 and $169,000.
  • Married filing separately. Same as for tax-deductible IRA.
Don’t forget, you can contribute to an IRA for a non-working spouse as long as you meet the eligibility requirements described above. 
Deciding which type of IRA to use will depend on your facts. If you expect your effective tax rate for 2008 to be relatively low, the Roth IRA will likely be your best choice. If you don’t qualify for either the deductible IRA or a Roth IRA, then do the non-deductible IRA. If the tax law doesn’t change, you’ll be able to convert your non-deductible IRA to a Roth IRA in 2010 with little or no taxes regardless of your income. Currently, you are ineligible for a Roth conversion if your AGI exceeds $100,000. Be sure to consult with your tax advisor.