2001 IRA Contribution Rules

This week's topics: 2001 IRA contribution rules for married couples and singles. Can you take a deduction? Should you "Roth" instead?

Dear Gail,
My accountant tells me to open a Roth IRA for myself and my wife, but the account executive of my stocks tells me it makes no sense to own it. My income this year was over $90,000 from all the stock that we own.  If  I do not have a retirement plan, should I do it? 
--George, Valencia , Calif. 

Dear George,

I agree with your accountant.  An IRA is a great way to sock away money for your later years-- especially since you don't have any other retirement plan.

The question is really what kind of IRA you are eligible for.  Keep in mind that maximum contribution to any IRA is $2,000/year.  A spouse who does not work can contribute to an IRA provided the other spouse has a job.  For your sake and that of everyone else who is justifiably confused about this, here are the rules for 2001 IRA contributions:

Traditional, deductible IRA. Contributions grow tax-deferred

Roth IRA: Contributions are never deductible, money grows tax-free

If you don't qualify for a deductible IRA, then you definitely ought to
consider a Roth IRA.  With a Roth, you get the tax break at the end, rather
than up front because every dollar you withdraw in retirement comes out
income tax free.
Go for it!

Hi Gail.
My friend and I  have a disagreement I hope you can settle.  My friend is single, self-employed and earns approximately $55,000 at her full-time job. Until now she was not covered by a company retirement plan. 
This month she took an additional part time job with a company that will allow her to contribute up to 10.5% of the $18,000 she will earn there (no matching funds) in a 403(b) plan.  I told her that she might not be able to continue to contribute to her IRA.  She thinks I am wrong (I hope for her sake she is right).  Can she make the maximum contribution to the 403(b) and still contribute $2000 to an IRA? 
Thanks for your help, Alyson

Dear Alyson-
You win.  But this doesn't necessarily mean she loses.

As explained in the previous answer, anyone who is not covered by a retirement plan at work can make a tax-deductible contribution to an IRA — regardless of their income. However, once you are an "active participant" in a retirement plan connected with any job,  then the tax-deductibility of your contribution depends upon your Adjusted Gross Income.

Although your friend obviously makes too much money to qualify for a tax-deductible contribution to a traditional IRA, she can still contribute on an after-tax basis.
Her choices are: 

1. Make a non-deductible contribution to a traditional IRA.  Her money will grow tax-deferred, but she'll owe taxes on the earnings when she makes withdrawals.  
2. Contribute $2,000 to a Roth IRA.   There is no income tax on withdrawals.
A Roth IRA is the perfect option for her.  Personally, I'm a big fan of Roths. Though you don't get a tax break at the front end, the big payoff comes later: ALL withdrawals made from a Roth IRA come out income tax free provided the account has been open for 5 years and you are at least 59 1/2.

If she can afford it, she ought to do both -- maximize her new 403(b) plan and contribute $2,000 to a Roth.
Hope this clears things up-

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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.