just starting their careers at low salary levels and for students who earn some money with a part-time summer job. “My son James is 15 and will earn about $2,000 this summer,” says Miller. “I’d think a Roth IRA would be perfect for him.”
Education IRA (new for 1998).
From the name alone, it’s easy to guess that the Education IRA has little to do with retirement nest eggs. Rather, it’s a new way to get ready for the shock of college tuition. And instead of waiting until retirement you can tap an Education IRA tax-free when your kid enrolls in college.
But there are caveats. As high as tuition is, Education IRA contributions cannot exceed $500 per child per year, and Uncle Sam won’t allow you to deduct any money put in from your taxable income. Another stipulation: contributions on behalf of a particular student can’t be made in the same year that student receives contributions for a prepaid tuition plan. which is available in many states. And there are income limits. To make the maximum $500 annual contribution, your adjusted gross income must be below $95,000 on a single return or $150,000 filing jointly. Smaller contributions can be made up to $110,000 and $160,000 in adjusted gross income. “Education IRAs wild also become part of the funds thee a student has available for college so less financial aid may be offered,” says James F. Murphy, director of undergraduate admissions and financial aid at Baruch College in New York City.
There’s one neat twist you’ll be glad to know, however. Anyone can contribute to an Education IRA for your kids. So even if your family’s income pushes you over the limit, there’s no preventing relatives–for example, a grandparent with a low retirement income–from making their $500 annual contributions. A note of caution: the maximum total contribution in an Education IRA is $500 per year per child. In other words, if family members pitch in, the total contribution can’t exceed $500.
So, you’re starting your own business, but still have an eye on that point in the future when you can finally kick back and take things easy. If you’re averse to piles of complicated paperwork, a simplified employee pension (SEP)-IRA might just be your ticket.
A SEP-IRA is governed by many of the rules that apply to IRAs in general. Contributions are deductible and early withdrawals face a penalty. The big difference: you can contribute much more to a SEP-IRA. An employer can contribute up to 15% of a participating employee’s salary (a $160,000 cap on eligible compensation limits for SEP contributions up to $24,000 per year). “The math is a little bit different for self-employed people,” says Peace. “The bottom dine is that they can contribute up to 13.04% of their adjusted gross self-employment income.” Thus, SEP-IRA contributions can be much more than the regular $2,000 IRA.
IRA maven Miller loves the SPE plan he started for his promotional products firm. “They’re flexible, and I can cut the contribution any given year when I