Here are the facts concerning the traditional IRA and the Roth IRA retirement accounts.
Traditional Individual Retirement Accounts
For 2008, you can contribute $5,000 to a traditional Individual Retirement Account (IRA) if you are under 50 years of age. If you contributed to an account through your employer, then deductions for your traditional IRA start to phase out if your adjusted gross income is more than $53,000 for single individuals and $85,000 f or married couples if they file jointly. If you are over 50 years old, you may contribute $6,000 to a traditional IRA, but the phase-out rules are the same. These contributions to a traditional IRA, before phase-out, are tax-deductible.
Roth Individual Retirement Accounts
The contributions to Roth IRAs are not tax-deductible. But, if you hold your Roth IRA for five years and you are 59 1/2 before you start taking withdrawals, those withdrawals are free from federal income taxes. For 2008, the maximum contributions are the same as for the traditional IRA at $5,000 if you are under 50 years of age and $6,000 if you are over 50. The contribution phase-out schedule is different, however. Phase out begins when AGI reaches $101,000 for single individuals and $159,000 for married couples filing jointly. One nice advantage of the Roth IRA is that it does not require distributions based on age.
You can contribute to both an IRA and 401(k) in the same year. In 2008, you can contribute $15,500 and if you are 50 or older you can contribute an extra $5,000. IRA and Roth IRA contributions must be made before April 15, 2009.
An individual (or spouse) must have compensation in the year that they contribute to an IRA. This compensation must be from "services rendered" and must be in the form of wages, tips, commissions, bonuses, royalties, and alimony.
Convert a Traditional IRA to a Roth IRA
Chances are, the value of your IRA is down this year (2008) due to the economic crisis. It may be just the right time if you want to convert your traditional IRA to a Roth IRA. You have to pay ordinary income tax on the converted amount. Since you may be converting less, the tax consequences will be less. If your new Roth IRA grows in value in the years to come, the converted amount won't be subject to tax. Your AGI must be $100,000 or less to convert your traditional IRA to a Roth IRA.
The best strategy is to consult a Certified Public Accountant (CPA) or a tax attorney in order to be sure that you get the best possible tax benefit from your retirement accounts.
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