Individual Retirement Accounts Still Cause for Confusion

Article excerpt

The IRS is trying urgently to clear up the mystery that still clouds Individual Retirement Accounts. From a tax viewpoint, which is more advantageous for a couple, to live together or get married? How much of an IRA can you deduct? So the questions go. The result is that taxpayers from coast to coast are confused.

With assistance of Prentice Hall tax attorney Eli J. Warach, I've worked up some dollar-saving answers that might work for you.

Q. I was eligible to contribute to an IRA in 1988, but I didn't make the payment before the end of the year. Did I miss the boat?

A. No. You still have time to set up or contribute to a 1988 IRA. You have until April 17, 1989.

Q. Neither my wife nor I belong to an employer-sponsored retirement plan. How much can we contribute to an IRA?

A. You can put in up to $2,000 each - provided you earn at least $2,000 each - and deduct what each of you contributes. That's true no matter how high your income is.

Q. Wait. Aren't deductible contributions to IRAs knocked out for people earning more than a certain amount?

A. That's right and wrong. Let's try to clear away the confusion.

1. If neither spouse is an active participant in a retirement plan, the deduction limits are as stated above.

2. A taxpayer who is married and files a joint return will be treated as an active participant in a plan if the taxpayer's spouse is an active participant in a plan. These taxpayers also are subject to additional limitations.

Q. If a single taxpayer, spouse or both spouses belong to retirement plans, what are the contributions and deduction limits?

A. They fall into three separate categories: married filing joint returns; single; and married filing separate returns.

There are different rules for each. Let's start with married couples filing joint returns: The key rule - one you must remember - is this: If one belongs to a retirement plan, both belong for tax purposes.

Couples who participate in a retirement plan and who have a combined adjusted gross income of $40,000 or more, start losing deductions for IRAs at a rate of $200 worth of deductions for each $1,000 of adjusted gross income. …