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Paging wallstreet....another IRA question

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Legend
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Joined: Jan, 2004
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Posted: #1
wallstreet-
 
Sorry to be a pest, but I could use your help here.  First off, I thought I would be eligible for a full Roth IRA contribution in 2007 so I made it back in April.  As it turns out, I'm barely eligible for a partial contribution (based on AGI, I can contribute about $600 or so). 
 
2 questions:
 
1. What am I facing if I accidently forget to move the $4K I contributed toward a Roth back in April 2007?  I do my Roth stuff on E-Trade....FYI.  I was talking to my tax accountant and he indicated one of his clients decided to conveniently forget that he wasn't fully eligible.  What are the odds this type of approach would get one in deep crap?  And I know you don't advocate such an approach....I'm just wondering what the consequences would be.
 
2. As part of my compensation, I have a simple IRA set up for me at work.  It's reported in box 12a and labeled with an "S" on my W-2's.  It is for $5K.  This $5K is NOT reported on my form 1040...in other words, it's a pre-tax contribution.  How does this affect my eligibility for either a Roth IRA or a Traditional IRA?
 
Does this simple IRA pre-clude me from contributing to any other IRA options?  The simple IRA at work is a given so that stays.  I'm just wondering if I have any other IRA options and if so, what ones?  I'm just confused as to how these all affect each other.
 
If I remember correctly, we're in pretty similar boats income-wise and also business-wise.  I'm hoping you have some experience here. 
 
Thanks as always.
 
 
 
Covers Linesmen
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Posted: #2
Will take some time later tonite and get all the answers for you.



I have some thoughts, but I want to write one reply versus several.
 
Covers Linesmen
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Posted: #3
Hutch,

Here is a good site for the Simple IRA question-

LINK

Question 1-

I am not a risk taker when it comes to an IRA and you are right there..the odds of getting caught are MINIMAL..how is the IRS going to audit and catch the firm who allowed the contribution? Odds are low for sure. Now if you get caught it could be a mess..from a disallowed contribution, to penalties etc..if you played stupid I am sure it wouldnt be that bad. They would penalize you, disallow the contribution, probably make you pay taxes on the gain and yank it out etc..

Question 2-

The simple IRA has nothing to do with the other IRA choices, where it COULD come into play (and it did for me two years ago) is if you did NOT have an employer sponsored plan available and you crossed the income threshold, they still allow you to invest in a traditional IRA, but not a Roth..the phase out didnt take place since a 401k/Simple wasnt in play.

What happens with a code S is it means a Simple IRA plan.

Here are two pages that discuss the Roth phase out and Traditional IRA phase out-

ROTH

Trad IRA

(make sure to read the phase out rules for the Trad IRA when you have an employee sponsored plan)

Also note that you can STILL make a traditional IRA contribution even if you pass the phase out levels, but it is not deductible..

I think that last line is what you were wanting to know, that even if you reach phase out that you can contribute to a TRAD IRA, but not have the deduction on taxes.

Let me know what questions you have.


 
Legend
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Joined: Jan, 2004
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Posted: #4
wallstreet-
 
I really appreciate the information and I believe this is exactly what I'm looking for.  You are exactly right, a couple years back, I did NOT have a simple IRA through work and was over the threshold for a Roth IRA.  I did contribute to a traditional IRA and it WAS deductible.  So you are right on there.
 
So basically, what I do with my Roth situation is up to me.  And since I'm covered by an IRA plan at work and my AGI is over 62K, I can contribute to a traditional IRA, but it's NOT deductible.  Does that sound about right?  That's what I'm seeing right now.
 
And as a follow up, what advantage would it be to contribute to a traditional IRA if it's not deductible? 

One last thing about this statement:  However, when making a withdrawal from a traditional IRA, all of the money that was never subject to federal taxes becomes taxable at withdrawal.
 
How in the he$$ does the government know what monies were invested and taken as a tax deduction and what monies were invested after taxes?  In some years, you might have partially tax deductible contributions and in others they might be fully deductible or not deductible at all.  I suppose you could look at your tax return for each year, but how is the IRS going to know what they tax and what they don't as far as a traditional IRA is concerned??
 
Thanks a million.  You've been a huge help.  This is stuff that I not only don't understand, it absolutely bores me to death.  Unfortunately, it's pretty important....I wish I treated it that way to a greater degree.
 
 
 
 
Covers Linesmen
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Posted: #5
Hutch,

No prob, always like helping.

You are responsible for book keeping on contributions of course.

The benefit of a non deductible contribution is the tax deferred growth, no other benefit.

Yep you are right about the phase out..if you are single and covered by a qualified plan, the phase out is done at 62k.

If you had the money and can afford it I would STILL make a contribution even though it isnt deductible..


 
Legend
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Posted: #6
The benefit of a non deductible contribution is the tax deferred growth, no other benefit.

Sorry to be an imbecile, but don't you have to eventually pay taxes on any growth when you take out the money?  I'm not getting how and growth would be tax deferred. 


 
Covers Linesmen
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Posted: #7
Hutch,

here is how it works.

You make a 4k NON-deductible contribution in 2008 and it hopefully turns into 40k in the next 30-40 yrs.

If this 40k were in a non-retirement acct you would pay taxes on dividends or any gains if you sold etc.

In a retirement acct you dont pay taxes until the money comes out..thus "deferred".

Plus the tax rate is flat and standard on retirement accounts, whereas capital gains taxes can be higher in certain circumstances.

So you are right about paying taxes when you pull it out but instead of paying while you are going, which in effect COULD take away potential capital (say if you were taking the capital gains taxes out of the principal if you had it invested in a non-retirement acct) then the multiplying effect could be reduced, thus the potential growth reduced.

More money stays WORKING if you defer taxes than paying as you go.

Let me know if that makes sense.
 
Legend
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Joined: Jan, 2004
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Posted: #8
Makes perfect sense.  I thought that might be the case.  In a sense, you can move it around in....say....mutual funds....without having to pay a capital gains tax....which would be the case if you were buying and selling stocks.  So a 10% gain in a stock purchase would maybe go down to around 7% after you paid your capital gains tax.  Where as you get to re-invest that entire 10% if you have it in an IRA.  By George I think I've got it. 
 
Thanks wallstreet.  Check is in the mail. 
 
 
 
 
 
 
 
 
 
 
 
Covers Linesmen
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Joined: Feb, 2003
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Posted: #9
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