Tuesday, May 22, 2007

IRA Funding

* An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA is a prohibited transaction and disqualifies the fund from its beneficial tax treatment.
* Rollovers, transfers, and conversions between IRAs and other retirement accounts can include any asset.
* The maximum for an IRA contribution in years 2006 and 2007 is 100% of earned income or $4,000, whichever is less, for an individual under the age of 50. Individuals aged 50 and older can contribute up to 100% of earned income or $5,000 whichever is less.
* This limit is for Roth IRAs, traditional IRAs, or some combination of the two. You cannot put more than $4,000 into your Roth and traditional IRA combined ($5000 for individuals aged 50 or more).

For example, if you are 45 and put $3,500 into your traditional IRA this year so far, you can either put $500 more into your traditional IRA or $500 in your Roth IRA. However, because this is still before the filing deadline (April 17, 2007) for calendar year 2006, the cash method taxpayer could get the full $4000 limit for the Roth by simply calling the $3,500 a Roth and not claiming the $3,500 above the line (i.e., reduces AGI) deduction and making the remaining $500 a Roth. There may be an additional administrative step needed so that the trustee which holds the IRA proceeds actually retitles or transfers the $3500 Traditional proceeds into the Roth category for their internal bookkeeping to survive an IRS audit.

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