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OTHER RETIREMENT IRAS

October 30, 2002

Roth IRAs are usually the best IRAs, when they are available. As discussed last week, they aren’t available to everyone. When they don’t let you use the Roth IRA, what other flavors are available?

DEDUCTIBLE TRADITIONAL IRAs are seldom a choice for taxpayers who cannot use Roths because the deductible Iowa income phaseouts kick in at lower income levels. For married taxpayers, deductible Roths start phasing out at $150,000. For taxpayers who are participants in retirement plans, the 2002 deduction for traditional IRAs phases out when income (technically, “Modified Adjusted Gross Income”) exceeds $54,000. If the taxpayer and spouse do not participate in a qualified plan, traditional IRA contributions are deductible at any income level.

WHO PARTICIPATES IN A QUALIFIED PLAN? If you work for an employer with a qualified plan, you are probably a participant. You are a participant if you receive an allocation – even if you elect not to contribute a 401(k) plan.

SPOUSE BREAK: If your spouse is an IRA participant but you are not, contributions to your IRA (but not the spouses) are deductible at higher income levels; the phaseout begins at $150,000.

DON’T DISMISS NON-DEDUCTIBLE IRAs. Even if you don’t qualify for a Roth IRA or a traditional IRA deduction, you can still make a non-deductible contribution to a traditional IRA. The earnings in the IRA accumulate tax-free until retirement. This significantly improves the after-tax return on the investment, and it is a lot cheaper than a variable annuity, which provides somewhat comparable tax advantages.

HOW MUCH CAN YOU CONTRIBUTE? For 2002, the lesser of your “earned income” (Wages or business income, generally) or $3,000; you can add another $500 if you are 50 years old by year-end.

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