What's good about investing in IRAs?

There are Roth IRAs and Traditional IRAs, both of which are discussed in the Financial Guide listed below. All IRAs defer taxation of investment income until funds are withdrawn. Contributions to Traditional IRAs in many cases are deductible; withdrawals from Traditional IRAs are taxable income, except for withdrawal of previously non-deductible contributions.

Can anyone have a traditional IRA?

If you have income from wages or self-employment income, you can contribute up to $5,000 in 2008. Thus, they are available even to children who meet these conditions. Contribution limits in 2009 and beyond will be indexed to inflation.

Can my homemaker spouse have an IRA?

Yes. Contributions of $5,000 for each spouse are allowed in 2008 if the couple’s wages or self-employment earnings are $10,000 or more.

What makes Roth IRAs so special?

Roth IRAs offer the following advantages:

• Withdrawals—if they qualify—are completely exempt from income tax, unlike all other retirement plans.
• Many can quickly build up their Roth IRA accounts by converting traditional IRAs into Roth IRAs—at a tax cost.
• Since you need not withdraw from your Roth IRA at any age, more can be passed on to heirs than would be allowed under other plans.

Can anyone have a Roth IRA?

Not everyone can have a Roth IRA. The following conditions apply:

• You can’t contribute to a Roth IRA for a year with income (AGI) above $116,000 if single or $169,000 on a joint return in 2008.
• You can’t convert a traditional to a Roth IRA with income above $100,000 (single or joint return). This rule is scheduled to end after 2009.
• You must have earnings from personal services—$5,000 or more to make the (maximum) contribution - though an additional contribution of $1,000 is allowed persons age 50 and over.

Can I set up a Roth IRA for my spouse?

Yes, subject to the income conditions above. This allows contributions of $5,000 each if the couple’s earnings are at least $10,000 in 2008. Contribution limits for 2009 and beyond will be indexed to inflation.

Can I set up a Roth IRA for my child?

Yes, for a child with personal service earnings, and subject to the other income conditions.

What's the downside to Roth IRAs?

The following is a brief list of negative issues regarding Roth IRAs:

• There’s never a deduction for Roth IRA contributions.
• To build a sizable Roth IRA fund, you must convert a traditional IRA (or, after 2007, funds form an employer plan). Conversions are taxable.
• In converting to a Roth IRA, you risk an excess contribution penalty and an early withdrawal penalty, if income exceeds $100,000. This rule is scheduled to end after 2009. See note below.

Note: The rule barring conversion to Roth IRA for taxpayers with MAGI above $100,000 is scheduled to end after 2009. All taxpayers will be able to convert a regular IRA to a Roth IRA in 2010. The conversion will be a taxable distribution which can be taken into income in 2010 or averaged over the next two years. The conversion will not be subject to the 10% early distribution penalty. Congress passed the removal of the $100,000 MAGI ceiling under unusual circumstances. We will keep you posted on whether this rule will actually go into effect or not.

What can I do if I converted to a Roth IRA and my income exceeds $100,000?

You can "re-characterize" your Roth IRA to a Traditional IRA (with suitable paperwork). This eliminates the Roth IRA and the tax. The deadline is the tax return due date including extensions.

What if my Roth IRA assets fall in value after conversion?

You can re-characterize as in the preceding answer, so you don’t pay tax on asset values you no longer have.

How are my heirs taxed on inherited Roth IRA wealth?

Your heirs are taxed as follows:

• No income tax whatever, if the funds have been in the Roth IRA at least 5 years.
• The heir can spread the withdrawal over his or her life, continuing the tax shelter for amounts not withdrawn.
• Estate tax treatment is the same as for traditional IRAs.

Burke, Worsham & Harrell, LLC