Have you heard of an IRA that is not tax-deductible? I'm not talking about the ROTH IRA. I'm talking about a traditional IRA, which is the only choice for many people (for various reasons that make investing in other types of IRAs unavailable).
In these situations, the IRS lets you put money into a traditional IRA, but you can't claim a tax break for it.
You still get tax-deferred growth, but when you retire, you'll have to pay taxes on your earnings (interest and capital gains), but not on the amounts you put in.
Did you know that Congress has passed a new law to encourage everyone to convert their traditional IRAs (whether they are deducted or not) into ROTH IRAs during the year 2010?
High earners with a single tax return in 2007 ($99,000–$114,000) or a joint return ($156,000–$166,000) cannot fully fund an ROTH IRA. People with Modified Adjusted Incomes of or more cannot put any money into an ROTH.
You may remember that with an ROTH IRA, there is no tax deduction. On the other hand, if you take the money out the right way, you don't have to pay income taxes. But I think everyone who can get an ROTH IRA should put money into one, especially younger people.
Also, people who have a retirement plan at work, like a 401(k), may not be able to invest in a deductible IRA. This depends on how much money they make. People with a Modified Adjusted Income between $52,000 and $62,000 and a Modified Adjusted Income between $83,000 and $93,000 who have access to retirement plans at work may not be able to deduct their IRA contributions.
So what should these people do to get ready for retirement better?
Most of the time, they can put money into a non-deductible IRA. Congress just passed new laws that let you convert these NON-DEDUCTIBLE IRAs into ROTH IRAs in 2010, no matter how much money you make. This makes this planning option more appealing than ever.
Plus, Congress improved the deal for you. When you switch to an ROTH that year, you don't even have to pay any income tax. In fact, the IRS will let you pay your income tax over the course of two years (2011 and 2012). So, you get a "loan" in 2010 that isn't taxed (so you don't have to pay more tax that year) and then you have two years to pay the tax you owe for switching to an ROTH. Nice!
Then you have an ROTH IRA, which means you won't have to pay taxes when you take money out of it in retirement. That's a great thing.
So, if your income keeps you from putting money into an ROTH IRA right now, you can put money into a traditional IRA (and take the deduction now) or a non-deductible IRA, depending on your situation. In 2007, if you are under 50, you can put up to $4,000. People over 50 can borrow up to $5,000.
Even if you've already filed your tax return for 2006, you can still fund an IRA for 2006. But only if it's before April 17 OR if you've asked for more time. To add the IRA deduction to your tax return, you just need to file IRS Form 1040X. (Talk to your tax pro about this.)
So put as much money as you can into these accounts and then change them to ROTH IRAs in 2010. Before you know it, that year will be here.
And it gets even better!
In 2010, you can move money from SEP IRAs and SIMPLE IRAs to ROTH IRAs. This will be great for taxpayers because they will pay taxes on their IRA balances, but they won't have to pay taxes on these funds (or their growth) when they retire.
Most people will only have money for retirement from money they sent ahead of time (and its growth). The more you send ahead and the earlier you do it, the better it is for YOU.
