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Tax Deductions and Credits on IRA (Individual Retirement Account) Contributions (February 2nd, 2008)
i) IRA Tax Deductions In a traditional IRA, any contributions you make are tax-deductible and any withdrawals you make will be taxed by the federal government upon withdrawal. However, if you contribute to an SEP IRA, Simple IRA or a Qualified IRA plan, you are considered an 'active participant' and the deductibility of your contributions is determined by your modified adjusted gross income (MAGI). The deductibility of your contributions is also determined by your tax-filing status; whether you are 'married filing separately', 'married filing jointly' or 'single.' If your Traditional IRA contributions are not tax-deductible, you can still contribute towards a traditional IRA. Alternatively, you can contribute towards a Roth IRA, here are the modified adjusted gross income (MAGI) limits.
Note: If your income falls in between the ranges that allow only 'partial contributions', you can use a special formula to determine that partial contribution. Tip: If you are married but have lived away from your spouse for the entire tax year, you are not considered as 'married' for tax filing purposes. Your Roth IRA MAGI limits will be based on single limitations. Note: If you make a non-deductible contribution to your traditional IRA, make sure you fill out IRS Form 8606. This form will help you and the IRS keep track of non-taxable balances in your Traditional IRA, should you make any withdrawals upon retirement. Download IRS form 8606 @ www.irs.gov Split Your Contributions Splitting your contributions between a traditional IRA and a Roth IRA can be beneficial in some cases. These cases are if: i) You are eligible only for partial contributions to a traditional IRA. Instead of contributing the non-tax deductible amount to the traditional IRA (and grow it tax-deferred), contribute it to a Roth IRA where it grows tax-free. ii) You are eligible only for partial contribution to a Roth IRA. To maximize your contributions for the year, contribute the remaining difference to a traditional IRA. Note: Your combined contributions to a Roth IRA and a traditional IRA should NOT exceed stated IRA contribution limits of $5000 for the year 2008. IRA Tax Credits You might be eligible for a non-refundable tax credit of up to 50% of your IRA contributions depending on your adjusted gross income and tax-filing status. Here is the table specifying tax credits under each tax-filing status.
These non-refundable tax credits are allowed in addition to any deductions you get for your IRA contributions. To claim the non-refundable tax credits, be sure to file IRS Form 8880.
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> Close Look at 401k Plans - How It Works, Contributions & Distributions > Understand 401k Hardship Withdrawals > Introducing Simple 401k Retirement Plans - Advantages and Disadvantages, Eligibility, Deadlines > Simple IRA versus Simple 401k Plans - Eligibility, Contribution Limits, Further Readings > Understanding the Roth 401k - Introduction, New Rules, Comparisons with Traditional 401k > Tax Treatment of Roth IRA Distributions > Tax Deductions and Credits on IRA (Individual Retirement Account) Contributions 401k Interesting Facts -> Roth 401k is voluntary for employers. In order to offer Roth 401k for their employees, employers have to set up a tracking system that segregates Roth assets from the company's existing plan. This tracking system is expensive to build and maintain, and employers may not choose to do it at all. If so, your employer will not be eligible to offer Roth 401k. -> Upto $10,000 can be withdrawn from a Roth IRA without any penalty if the owner wishes to purchase a home or principal residence. The home must be purchased by either the Roth IRA owner, his spouse, ancestors or descendants. Also, the Roth IRA owner must not have previously owned a home for atleast 24 months. -> Roth 401k Works Best if: - The federal government increases taxes
over time
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The
important benefits of contributing towards an IRA are the tax deductions
against annual income, tax-free growth of earnings and the non-refundable
tax credits. You want to maximize the returns you get from contributing
to your IRA, therefore it is essential to know the rules & limits
placed behind these priviledges we just mentioned.