Roth IRA Rules for Retirees

Reader question: How much money can I contribute to my Roth IRA? My W-2 income is zero.  My taxable income comes from Required Minimum Distributions from rollover and contributory IRAs (I am over 70.5 years old), interest, dividends, capital gains from investments, and royalties from mineral rights. B.L.

Answer: In order to be eligible to contribute to a Roth IRA, traditional IRA or other retirement plan you must have ‘earned’ income…meaning income from either employment or self-employment. You can contribute 100% of earnings up to $5,500 ($6,500 if you are age 50 or older) unless you earn so much that you get phased out of eligibility.

Reader question:: I have a 21 month old grandson for whom I would like to start a 529 college plan. I have looked into the options. The Alabama plan is the only one that will give me a state tax deduction on up to $5000 per year of contribution. The plan is not a bad one. The underlying investments are fairly priced and are good funds. There are many Vanguard Index funds to choose from and because the program is “the record owner of the shares” the fees are institutional rates- even lower than individuals can get.

I have two concerns. The first is that the plan charges a 0.25 annual program management fee.

The second is that, I am not the record owner of the shares. Are either of these of any importance? Are there other state plans that would be better, even if I would lose the state tax deduction? Ohio and Utah are the ones promoted by the media. V.F.

Answer: The one quarter of one percent goes to help pay for the expenses to run the program by the State of Alabama and seems a very reasonable fee so I would not let that discourage you. If you invested $5,000, as an Alabama resident, you could receive up to $250 in income tax benefits (depending on your income tax bracket) so folks who live in Alabama have a nice incentive in invest in our state’s plan. For joint tax filers, you receive double the tax benefits.

When you sign up for the Alabama 529 plan, you get to elect who will be the owner of the plan and that person controls the money until it is finally dispersed. The owner has the ability to move the money from one child’s account to another and even has the ability to personally take the money back out of the plan but would owe income taxes on the gains plus a 10% federal penalty. This is not like the situation under the Alabama PACT plan.

Reader comment: Your column on Obamacare was excellent.  It was balanced in that you pointed out the positives of the Act.  You did miss a couple of potential issues.  The insurance industry may be in confusion for several years which could further affect rates.  If it gets to catastrophic problems, the government is likely to bail out insurers just as it did the banking industry.  The cost of the Act has been conservatively estimated at a trillion dollars over 10 years.  If it is more than that and our leaders can’t make progress on reducing the deficit, we could be faced with severe economic problems.  You are right that it is the most sweeping social program in a generation and we don’t know the full cost or its impact.  All the more reason to be careful with your income and investments. J.E.

My response:You are exactly right! I ran out of space in my column to fully discuss the ideas that you mention. Most people don’t know the Obamacare law already provides that the government will bail out the insurance companies for any losses for the first two years! If it goes badly, expect the insurance companies to lobby for an extension of the bailouts.