FOR IMMEDIATE RELEASE:

IRA RETIREMENT SAVINGS RULES FOR 2007

Tax-saving opportunities continue for retirement planning due to the availability of Roth IRAs, changes that make regular IRAs more attractive, and other retirement savings incentives. As discussed herein, even more changes began in 2007.

Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2007 is $4,000. Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA but their contributions are limited in amount depending on their AGI. For 2007 the AGI phase-out range for deductibility of IRA contributions is between $52,000 and $62,000 of modified AGI for single persons (including heads of households) and between $83,000 and $103,000 of modified AGI for married filing jointly. Above these ranges no deduction is allowed. The $20,000 spread for joint returns is new for 2007 (up from $10,000).

For 2007, a $1,000 "catch-up" contribution deduction is allowed for taxpayers, age 50 or older by the close of the taxable year, who meet the other qualifications for IRA deductions. Thus the total deductible limit for these individuals may be as high as $5,000.

In addition an individual will not be considered an "active participant" in an employer plan simply because the individual's spouse is an active participant for part of a plan year. Thus, you may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work subject to a phase-out if your joint modified AGI is $156,000 to $166,000 for 2007. Above this range no deduction is allowed.

Roth IRA: This type of IRA permits nondeductible contributions of up to $4,000 a year. Earnings grow tax-free and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 59 1/2. Distributions may be made earlier on account of the individual's disability or death. The maximum contribution is phased out for persons with AGI above certain amounts: $156,000 to $166,000 for joint filers and $99,000 to $114,000 for single filers (including heads of households). For 2007, a $1,000 "catch-up" contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $5,000 for these individuals.

Roth IRA Conversion Rule: Funds in a traditional IRA may be rolled over into a Roth IRA. Such a rollover however is treated as a taxable event and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.

A taxpayer's AGI (whether married filing jointly or single) is limited to $100,000 to make such a conversion and the taxpayer must not be a married individual filing a separate return.

401(k) Contribution: The 401(k) elective deferral limit is $15,500 for 2007, up from $15,000 in 2006. If your 401(k) plan has been amended to allow for catch-up contributions for 2007 and you will be 50 years old by December 31, 2007, you may contribute an additional $5,000 to your 401(k) account for a total maximum contribution of $20,500 ($15,500 in regular contributions plus $5,000 in catch-up contributions).

SIMPLE Plan Contribution: The SIMPLE plan deferral limit is $10,500 for 2007, up from $10,000 in 2006. If your SIMPLE plan has been amended to allow for catch-up contributions for 2007 and you will be 50 years old by December 31, 2007, you may contribute an additional $2,500.

Catch-Up Contributions for Other Plans: If you will be 50 years old by December 31, 2007, you also may contribute an additional $5,000 to your 403(b) plan or SEP.

Saver's Credit: A nonrefundable tax credit is available based on the qualified retirement savings contributions to an employer plan made by an eligible individual. For 2007, only taxpayers filing joint returns with AGI of $52,000 or less, head of household returns with AGI of $39,000 or less, or single returns (or separate returns filed by married taxpayers) with AGI of $26,000 or less are eligible for the credit. The amount of the credit is equal to the applicable percentage (10% to 50% based on filing status and AGI) of qualified retirement savings contributions up to $2,000.

Maximize Retirement Savings: In many cases employers will require you to set your 2008 retirement contribution levels before January 2008. You may want to increase your contribution to lower your AGI in order to take advantage of some of the tax breaks described above. In addition, maximizing your contribution is generally a good tax-saving move.

2006 Pension Act Relief Changes for 2007: Effective for distributions made after 2006, non-spouse beneficiaries may roll over to an IRA, or other plan structured for that purpose, amounts inherited as a designated beneficiary. The inherited amounts are subject to the annual minimum distribution rules requiring distributions over the person's life expectancy (recalculated annually). Also, for taxable years beginning after 2006, the IRS must make available a form for a taxpayer to file with the IRS directing the IRS to send a refund directly to the taxpayer's IRA. Effective for distributions made after September 11, 2001, a reservist (called up between September 11, 2001, and before December 31, 2007, for more than 179 days) is excepted from the 10% premature distribution tax for distributions before age 59 1/2 to a reservist and allows the money to be repaid within two years after the end of active service. Effective for distributions made after August 17, 2006, public safety officers can avoid the early 10% distribution penalty for distributions based on separation from service if the officer is at least 50. Individuals who worked for a bankrupt employer whose officers were indicted and whose employer had at least a 50% match in the form of employer stock in its 401(k) plan can make an additional IRA catch-up contribution $3,000 (three times the otherwise applicable catch-up amount). The contributions can be made for 2007, 2008, and 2009. For tax years beginning after 2006, after-tax contributions from qualified plans may be rolled over into defined benefit plans and 403(b) tax-sheltered annuities.

This article was intended to provide general information about retirement options. It does not contain all the rules and exceptions that may apply to your situation. If you have further questions regarding retirement options, I can be reached at dianne@dgoodmancpa.com.

Happy Retirement!

Visit Retirement Planning for Small Business if you would like to know more about Small Business Retirement Plans.

Visit Starting a Business? if you would like to know more about Starting Business Basics.

About the Author

Dianne Goodman, CPA, FCPA -Specializes in servicing Small Businesses and Individuals. Visit www.dgoodmancpa.com for relevant and current information on a variety of financial and tax issues focusing on small businesses and individuals or call at 1-888-851-1975.

CONTACT INFORMATION:

Dianne Goodman, CPA, FCPA
Comprehensive Small Business Solutions, PC
505 323-2307
1 888-851-1975 toll free
www.dgoodmancpa.com