The New Array Of IRAs

Here's a tax break that just got better. B.E. checks out the new rules and regulations helping you save for retirement helping you save for retirement or college. .

is a different matter. Depending on your circumstances, some, all or none of your IRA contribution may be deductible.

Virtually anyone who works can contribute up to $2,000 to an IRA each year. However, a smaller number can deduct any or all of their contributions. Here are the ground rules:

  • If neither you nor your spouse is an active participant in an employer-sponsored qualified retirement plan, each of you can get a full deduction.
  • If one spouse participates in an employer’s plan but the other does not–including nonworking spouses–the nonparticipant can get a full deduction if joint adjusted gross income (AGI) is $150,000 or less. Smaller deductions are permitted up to $160,000 in AGI.

Say Janice Jones is covered by her employer plan but her husband John is in medical school. In 1998, their AGI is $156,000. Janice can make a $2,000 nondeductible IRA contribution. John isn’t covered by an employer plan. However, because their AGI is 60% through the “phaseout range” ($150,000-$160,000), his deduction is limited to 40% of $2,000, or $800. Besides his deductible $800 contribution, John can make a nondeductible IRA contribution of up to $1,200 if he wishes.

Even if you are covered by an employer plan, you can deduct IRA contributions if your AGI is below a certain level. For full deductions in 1998, your AGI must be below $30,000 (single filers) or $50,000 (on a joint return). Partial deductions are available up to $30,000 and $50,000, respectively (see chart).

These phaseout ranges will increase each year until 2005, when it will be $50,000-$60,000 for single filers. For joint returns, the increase continues until 2007, when the phaseout range reaches $80,000-$100,000.

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