Tax Info Blog

4 New Ways to Make Roth IRA Contributions

2006 has (so far) seen a sea change in eligibility to contribute to Roth IRAs.  In fact, there are (or soon will be) four new ways for previously-ineligible people to contribute to Roth IRAs:

1. Higher AGI limits in the pending pension bill
2. Roth 401(k) contributions which can be rolled into Roth IRAs
3. The end of the conversion AGI limit for two years as part of TIPRA
4. Direct pretax 401(k) to Roth IRA rollovers in the pending pension bill

Major Provisions of Trifecta Bill

Below are some noteworthy items from the "trifecta" bill (minimum wage, extenders, death tax):

1. Death tax exclusion raised to $5,000,000.  Unified credit limited to this amount of estate.  Unused exclusion and credit passes to spouse.  Inflation adjusted. 

2. Death Tax rate schedule (all inflation-adjusted):

$0-$5,000,000: 0%
$5,000,001-$25,000,000: long-term capital gains rate (currently 15%, set to rise to 20%)
$25,000,001 onward: 30%

3. New restaurants have a 15-year depreciable life (6.67% per year), compared to 39 or 40 years for other non-residential structures.  Other extenders extended.

4. Minimum wage set at $7.25 per hour as of 6/1/09. 

Incentive Stock Option Credit Relief in House-Passed Pension Bill

Currently, there are different tax rules for incentive stock options (ISOs) under regular income tax and the alternative minimum tax (AMT).  To alleviate this burden, the difference in taxation can be taken as a credit toward future AMT.

However, people given this credit and then not able to use it in future years (because they were no longer in AMT) have been stranded (until now).

Charitable IRA Giving and Tightened Charitable Donations in House Pension Bill

Two quick charity-related items from the House-passed pension bills:

1. IRA distributions for charitable contributions are tax-free up to $100,000 per annum
2. Any clothing/household goods donations over $500 must be appraised by the charity before they can be deducted by the donor.  This basically extends to household goods what was done for car donations

529 Plans Made Permanent By Pension Bill

Another quick non-pension related item from the House-passed pension bill.  It makes 529 plan rules permanent.  Assuming this becomes law, that means people can plan with confidence that these will be around.

Perpetual IRA Rollover and Other Underreported Goodies in House Pension Bill

Some very exciting things are in the defined contribution side of the pension bill, most of which's attention has focused on the defined benefit side.

Currently, only a spouse may roll over an inherited IRA into their own IRA.  As part of the defined contribution end of the House pension reform bill (which represents the consensus formed in committee), this rollover ability would be allowed for any IRA beneficiary.

This means that, in theory, an IRA could be rolled over from person to person, and from generation to generation.  In the case of Roth IRAs, this represents a significant opportunity to shield large amounts of assets from the double taxation of the death tax.

HSAs: The Basics

Q: How do HSAs work?  Should I get one?
Geoff, Arlington VA

A: Health savings accounts are a relatively new kind of health insurance product.  They combine a high deductible health plan (HDHP) with a tax-advantaged savings account (HSA).  Unused money grows tax-free like an IRA, and neither contributions nor distributions are ever taxed if used for health care...

The Laffer Curve

Q: Tax Playa, what is the Laffer Curve, and what does it tell us about the real world?
Michael, Philadelphia PA

A: The Laffer Curve is a mathematical theory created by Art Laffer.  The basic idea is that as high marginal tax rates come down, revenues go up.  At some point, a revenue-maximizing level is attained, and further marginal rate cuts reduce revenue.

Conversely, as very low marginal tax rates rise, tax revenue also rises until a revenue-maximizing point is hit.  After that, the high marginal tax rates discourage revenue growth.

401(k) and Other Basic Workplace Retirement Plans

Q: I want to open a retirement plan for myself and my small business.  I'm self-employed now, but may soon have employees.  What should I look at?
Terrence, Arlington VA

A: There are several major types of defined-contribution retirement plans businesses can set up.  Below is a brief introduction to them:

N.B. A very good description of these can be found in IRS Publication 590, Retirement Plans for Small Businesses

IRA Limits

Q: Tax Playa, how much can I put in an IRA in 2007?
Scott, Arlington VA

A: The lesser of $5000 or earned income can be contributed to all types of IRAs for 2008 ($10000 in the case of a married filing jointly household).  Additionally, $1000 ($2000 in the case of a married filing jointly household) in "catch-up" contributions can be made.

A person can contribute either to a Traditional IRA or a Roth IRA, or both (but not to exceed the limits above).