Five things you didn’t know about IRAs.

We’ve been fielding client questions about IRA contributions recently and thought a blog post would be in order.  Here are the top five things many people aren’t aware of when it comes to IRAs:

1. Most people can make an IRA contribution for tax-year 2010 up till their tax-filing deadline (April 18 in most cases), and remember you need to file form IRS 8606 in many cases.
2. You may be able to take a federal tax deduction for your traditional IRA contribution. Some people may even be eligible for a tax credit equal to their contribution.
3. You can contribute to an IRA even if you are currently participating in a retirement plan at work (401k, 403b, etc.), but you may not be able to deduct the amount contributed.
4. You may be able to make a contribution to your spouse’s IRA, even if your spouse does not have earned income for the year.
5. The maximum amount you can contribute for 2010 to a traditional IRA is 5,000 for 2010 (6,000 if you’re over 50 years old).

For many people, Roth IRAs are attractive since distributions during retirement from Roth IRAs are not taxed. Distributions or withdrawals from traditional IRAs or retirement plans are subject to income tax in most instances.

In effect, you are saving more with a Roth IRA since you’re paying the taxes up-front. A $100 saved in a Roth IRA may mean lower income today than a $100 saved in a traditional IRA, but when it comes time to use the money, you will have more available since you pay no income taxes on regular withdrawals.

Here are five things people often don’t realize about Roth IRAs:

• Income limits that govern who can contribute to a Roth IRA have risen slowly over the past few years, the 2010 limits are here.
• Virtually anyone who has a traditional IRA can convert it to a Roth IRA (this started in 2010). The $100,000 income limit has been removed. You may have to pay taxes on part of the converted amount (typically contributions you claimed a deduction against and earnings).
• Unlike traditional IRAs, there are no required minimum distribution rules for Roth RIAs, so you could leave your Roth IRA savings undisturbed after you turn 70 and a half.
• Just like a traditional IRA, you could contribute to a Roth IRA for your spouse, but this is subject to income limits.
• You may be eligible for a tax credit if you contribute to a Roth IRA, have income below certain thresholds and meet a couple of other criteria.

The IRS website on publication 590 provides the definitive overview on IRA plans (we’ve linked to many relevant sections of the document in the text above).

Of course, there are many other considerations when saving for retirement. We’re happy to answer questions you may have, just give us a call at 646-619-1157.