Consider
Contributing The Maximum Toward Your Retirement. As
your income rises and your marginal tax rate increases, deductible retirement
plan contributions generally become more valuable to you. Also,
making your deductible contribution to the plan as early as possible
generally increases your retirement benefits.
As you evaluate how much you should contribute, consider the following:
$ IRA Contributions.
If you are married, even if your spouse has no earnings, you can deduct
up to $6,000 ($7,000 if you’re both at least age 50 by the end of the year)
for contributions to your and your spouse’s traditional IRAs. Note!
No more than $3,000 ($3,500 if you=re
at least age 50) may be contributed to either your or your spouse’s IRA
during any one tax year (except for rollover contributions). You must have
earnings at least equal to the contribution. If you are an active participant
in your employer’s retirement plan, your IRA deduction is phased out ratably
as your adjusted gross income increases from $65,000 to $75,000 on a joint
return ($45,000 to $55,000 on a single return).
Planning
Alert!
Every dollar you contribute to a deductible IRA reduces your allowable
contribution to a nondeductible Roth IRA.
$ Using IRA Funds For Education Or First-Time
Home-Buyer Expenses.
If you have an IRA, you can withdraw funds for qualified higher
education expenses or qualified first-time home buyer expenses (up to
$10,000), without having to pay the normal 10% early distribution penalty. The
distribution is, however, still taxable.
Tax Tip. The distribution for higher education
expenses, although taxable, may generate a HOPE credit or a Lifetime Learning
credit.
$ Workers Over Age 70.
If you are over age 70, you cannot make a contribution to a traditional
IRA. Tax Tip.
If you are working, over age 70, have a spouse under age 702,
and otherwise qualify, you can make a deductible IRA contribution to a
separate traditional IRA for your spouse even where the spouse has no earned
income. Also, if you otherwise
qualify, you can contribute to your nondeductible Roth IRA even after you
reach age 70.
$ Consider Contributing To Your Company’s
401(k) Plan. If you are
covered by your company’s 401(k) plan, you should consider putting as much
of your compensation into the plan as allowable. The maximum amount for 2004
is $13,000 ($16,000 if you’re at least age 50 by the end of 2004). This is
particularly appealing if your employer offers to match your contributions.
$ Consider A SIMPLE Retirement Plan.
Businesses (including self-employed persons) may, if qualified,
set up a simplified retirement plan (called a SIMPLE plan).
SIMPLE plans are designed to be less costly and easier to administer
than other qualified plans and allow an employee to contribute up to $9,000
($10,500 if you’re at least age 50 by the end of the year).
The
Roth IRA - A Valuable Retirement Savings Option. The
Roth IRA continues to be a popular retirement savings option. If you have
earned income at least equal to the contribution, you may make a nondeductible
contribution of up to $3,000 ($3,500 if you are at least age 50) to a Roth
IRA. You may generally make a contribution for 2004 anytime on or before April
15, 2005. If you are married, you
can contribute up to $3,000 for yourself, and an additional $3,000 for your
spouse, provided your combined earnings are at least $6,000. However, the $3,000 contribution limits are phased out as
your adjusted gross income increases from $150,000 to
$160,000 on a joint return ($95,000 to $110,000 if single).
Also, the $3,000 amount you may contribute to a Roth IRA is reduced by
any contributions you make to a regular IRA for the same tax year.
You
can not deduct your contributions to a Roth IRA. However, qualified
distributions from the Roth are tax free.
If you maintain your Roth IRA for at least five years, amounts may be
withdrawn completely tax free if you meet any of the following conditions: (1)
you have attained age 59, (2) the distribution results from your death
or disability, or (3) the distribution is for qualifying first-time
home buyer expenses. Also, distributions from a Roth IRA are deemed to come
from your nondeductible contributions first. Thus, you may generally withdraw
any or all of the amounts you have contributed tax free without meeting the
above requirements.
Setting
Up A Roth IRA For A Minor.
You can
set up a Roth IRA for your minor child, provided the child has "earned
income" at least equal to the Roth IRA contribution (the maximum
contribution is $3,000). Your
child's earned income can include money from baby sitting or mowing lawns.
Furthermore, if your child's outside earnings do not exceed $400, the child
will not be subject to Social Security taxes.
If you are a sole proprietor, you don’t have to pay FICA or medicare
taxes on wages paid to your child who is under age 18.
Furthermore, assuming you are paying reasonable compensation, your
child’ swages may be taxed at a rate as low as 10% and deducted by you at
your rate (as high as 35%).