Cents and Sensibility
Cents and Sensibility
It's a good time to own an IRA. Why? Because now you can put more money in and you won't have to take as much out. New IRA rules can
help you and your heirsLet's look at both sides of the IRA equation, beginning with "put more in."
You now can contribute up to $3,000 a year to either your traditional or Roth IRA. This figure will gradually rise to $5,000 in 2008, after which the ceiling will be indexed for inflation.
If you are at least 50 years old, you may be able to make catch-up contributions to your IRA. Increasing your contributions means more security during retirement. An eligible married couple could contribute $7,000 in 2002.
The ability to put away more money in your IRA provides you with some significant tax advantages. By contributing to a traditional IRA, your earnings will grow tax-deferred and you may lower your annual taxable income. While you can't make tax-deductible contributions to a Roth IRA, your earnings will grow tax-free, provided you meet certain conditions.
These higher contribution limits can help you build your retirement savings. However, at some point, you'll need to start taking money out of your IRA. You can make penalty-free withdrawals as early as 59 1/2, but once you do, you'll be taxed at your ordinary income tax rate (assuming you took the withdrawals from a traditional IRA). So if you don't really need the money, you could incur unnecessary taxes by making these IRA withdrawals, and you may opt to delay them.
You will have to start taking mandatory minimum IRA withdrawals on April 1 of the year after you turn 70 1/2. And now, thanks to some recently enacted IRS rules, the definition of "minimum" has changed, allowing you to take smaller annual distributions.
Under the old guidelines, you had to follow some complicated formulas to calculate minimum withdrawals. And if you picked the wrong method, you could have ended up taking out larger sums than you wanted and facing an inflated tax bill.
But the new withdrawal rules are less complex. And, more importantly, they may allow you to reduce your taxes and preserve a larger percentage of your IRA for your heirs.
The new guidelines employ the following calculation methods:
Joint life expectancy: If your spouse is more than 10 years younger than you are, you can select a joint life expectancy calculation. Spreading out the life expectancy in this way can result in smaller minimum distributions.
Uniform table: If you don't qualify for the joint life expectancy calculation, you'll use a uniform table that assumes your beneficiary is 10 years younger than you are. This results in a smaller minimum distribution for married couples who are just a few years apart in age and who name each other as beneficiaries.
Here's another favorable change: Under the new IRA guidelines, beneficiaries who inherit IRAs can take withdrawals based on their life expectancies, which could mean lower taxes along the way. Under the old rules, your children or other beneficiaries generally had to withdraw all the IRA money in a short time period -- which could have left them with huge tax bills.
See your tax adviser before you begin taking IRA distributions. Although the rules may have changed in your favor, you still need to make the right moves.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com