2010 Virginia Legislators' Tax Guide: Personal Financial Planning

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You may qualify to make either a deductible or non-deductible contribution to an IRA. Both you and your spouse (working or non-working) may each contribute the lesser of (1) 100% of your individual compensation includible in gross income for the year, or (2) $5,000 to your IRA.

Individuals age 50 and over can make an additional $1,000 annual catch-up contribution.

Features of regular deductible IRAs include:

• The deductible IRA contribution limit for a Single Active Participant in a Qualified Plan is phased out between $55,000 and $65,000 of Modified Adjusted Gross Income (MAGI) in 2009. The deductible IRA contribution MAGI limit for Married Filing Jointly Active Participants is $89,000 and $109,000 in 2009. The 2009 deductible IRA contribution MAGI for an individual filing a "Married Filing Separately" return will be phased out if your MAGI is more than $10,000.
• Each spouse's deduction is calculated separately if only one is covered by a pension plan; however the deduction for the non covered spouse is phased out as the joint modified adjusted gross income between $166,000 and.$176,000.

The Roth IRA is another type of IRA. Basically, contributions are non-deductible going in and distributions are non-taxable coming out. In other words, it is a "back-ended" IRA. Other general features of the Roth IRA are:

• Contributions are limited to lesser of (1) 100% of your individual compensation includible in gross income for the year, or (2) $5,000 per year less amounts contributed to other IRAs.($6,000 if age 50 or older)
• Contributions can be made even after age 70 ½ if there is earned income.
• No minimum distributions are required upon turning age 70½.
• AGI limits are $166,000 to $176,000 (married filing jointly), $0 to $10,000 (married filing separately) and $105,000 to $120,000 (single and head of household).
• The above ranges apply regardless of whether the taxpayer is an active participant in an employer-sponsored retirement plan.
• Qualified distributions are tax-free if five years have passed since the first contribution, and
  • Taxpayer is at least 59 ½ years old or disabled, or
  • Distributions are used for qualifying first-time homebuyer expenses.

A regular IRA owned by the taxpayer may be converted to a Roth IRA. The 10% early distribution tax would not apply to the conversion. To qualify to roll over or convert an existing IRA to a Roth IRA, the taxpayer's Modified Adjusted Gross Income (MAGI) for 2009 must be $100,000 or less (excluding the amount of the rollover) and the taxpayer may not use the filing status Married Filing Separate for the tax year. For 2010, there is no income limitation and there is a special election to allow taxpayers to pay the related income tax over a two-year period.

Paying the tax on an existing IRA and converting it into a Roth IRA could provide unlimited tax-free build-up until death. Distributions to the beneficiary also would be tax-free. To convert or not to convert will require individual analysis. Factors to be considered in resolving this question include:

• Taxpayer's current tax bracket vs. tax bracket projected for retirement years
• Taxpayer's other sources of funds in both the current year and retirement years
• Taxpayer’s age and expected retirement date

Reconversions will also require individual analysis, and you should consult your CPA as to whether the reconversion is advisable in your situation.

See IRS Publication 590 or consult your CPA for additional information.