New IRA Rules

Three 2008 tax law changes that IRA holders should know about.

Before the new year begins, let’s take a look at three notable tax law changes for 2008 involving IRAs.

Higher IRA contribution limits. If you have a Roth IRA or Traditional IRA, you can contribute up to $5,000 to it during 2008. That’s up from a $4,000 limit for 2007. (If you will be 50 or older at the end of 2008, you can add up to another $1,000 to your IRA as a catch-up contribution.)¹

This raised contribution limit allows you to take more advantage of the power of compounding. Hypothetically, let’s say your IRA earns a consistent 5% annual return for the next five years. Do the simple math, and you will see that $1,000 at 5% annual growth compounds to $1,276.25 in five years, and $5,000 at 5% annual growth compounds to $6,077.54.

If you have both a Roth IRA and a Traditional IRA, your total contribution to both accounts cannot exceed $4,000 in 2008 ($5,000 if you are age 50 or older).²

The end of the IRA charitable rollover. Charities and universities are rightly mourning the loss of a great gifting opportunity. The 2006 Pension Protection Act allowed taxpayers over age 70½ the chance to reduce their taxes through an IRA gift during 2007 – a direct IRA rollover to the non-profit of their choice. But in 2008, the opportunity will disappear, as Congress took no last-minute action to save it.²

You can still make charitable gifts in 2008 using your IRA. You just have to do it the old-fashioned way: you report the IRA withdrawal as income, and declare an offsetting income tax deduction for the charitable contribution. But the AGI cap on charitable contributions and the itemized deduction phaseout may restrict this.

A possibility to do a direct rollover from a 401(k) to a Roth IRA. Previously, assets from a 401(k) had to be rolled into a Traditional IRA before they could be rolled into a Roth IRA. During 2008, certain 401(k) plan participants can make a direct rollover.³ Inquire with a qualified, knowledgeable financial advisor to see about your eligibility.

In fact, when it comes to any decision regarding your IRA, it is wise to consult a qualified financial advisor. This is certainly one of your most important investments, and any choice you make with it should be made with utmost care and knowledge.

Citations.

¹ money.aol.com/retirement/fct1/_a/retirement-planningdefined-contribution/20050225134209990013

³ newsday.com/news/columnists/ny-kidtwo5424352oct21,0,1528134.column

³ ncpg.org

⁴ nytimes.com/2006/09/17/business/yourmoney/17fund.html?_r=1&pagewanted=print&oref=slogin