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Not Your Grandmother's Retirement Account - The Traditional IRA

© Ann Needle

Gone are the days of the 1970s when individual retirement accounts (IRAs) were fully tax deductible. Then again, things have gotten better over the last decade, when any growth on these accounts could be tax deducted only by the few.

Tax-law changes resulting mainly from the Taxpayer Relief Act of 1997 have made traditional IRAs tax deductible by more of you, while expanding the instances where you can get money out before retirement without being socked with a tax penalty. You also have the choice of another IRA - the Roth - but that's a story for the next story.

IRA: Tradition with a Twist

With a traditional IRA, anyone can generally contribute up to $2,000 annually ($4,000 for couples) and put off paying taxes on any earnings until withdrawal. As you probably know by now, this can help your account grow faster than it would if the earnings were taxed every year. Note, however, that this limit is reduced by any contribution you or your spouse make in the same tax year to a Roth IRA.

Obviously, traditional IRAs make the most sense for those who can deduct contributions. What you can deduct depends on your income and whether you or your spouse are covered by an employer-sponsored pension or retirement plan in the year you make those IRA contributions. If you're wondering exactly how the Internal Revenue Service (IRS) defines one of these plans, go to the IRS's Publication 590, Individual Retirement Arrangements, and the section on deductions at http://www.irs.gov/forms_pubs/pubs/p5900... (See "Are Your Covered by an Employer Plan?")

· If neither you nor your spouse has an employer plan, then go ahead and deduct your full contribution.

· If you are covered by an employer plan, IRA contributions are fully tax-deductible in 2000 if you earn less than $32,000 in modified adjusted gross income (AGI) as an individual, or this income as a joint tax filer doesn't exceed $52,000. (In this case, you may be able to deduct part of your contribution if your income is no more than $42,000, or $62,000 if filing a joint return.) The good news is that the income limits for full deductibility if you also have an employer plan will increase year-by-year until 2007, when they will reach $50,000 for singles and $80,000 for couples.

· Should your spouse be covered by an employer plan - and you are not - this tax year, then you can fully deduct your contribution if you earn less than $150,000 as a joint filer (and you can take a partial deduction if earning up to $160,000).

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