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Financial Planning / Tax Strategies


Subject:  Re: definition of self-employed? Date:  12/19/1997  8:14 PM
Author:  TMFTaxes Number:  953 of 123155

<<It looks like the Roth IRA would be the best bet, as my SEP income totals only ~$8K. The only
reason I was interested in the SEP was the possibility of making a contribution larger than $2K.

Am I correct in assuming that any gain on investments in a Roth IRA will never be taxed?>>

First of all, remember that the Roth IRA is only available beginning in 1998. So for 1997, your option is limited to a regular IRA.

As far as the Roth IRA goes, in order for the income to be received tax free, there are various standards that must be met. Check this out for some additional details...

The NEW Roth IRA

Effective for tax years beginning after 1997, there's a new type of back-ended IRA - called the Roth IRA - to which taxpayers and spouses (even those who have attained age 70-1/2 and/or are a participant in another qualified employer pension or profit sharing plan) will be able make annual nondeductible contributions of up to $2,000 of compensation. Qualified distributions (defined below) from a Roth IRA will be tax-free.

Contribution limits: The amount that can be contributed to a Roth IRA for an individual will be reduced by the excess of:

1. the maximum amount allowable as an IRA deduction for the individual for the year (determined without regard to the ban on non-Roth IRA contributions for age-70-1/2 taxpayers and the AGI-based phaseouts for active plan participants), over

2. the total amount of the year's contributions to all non-Roth-IRAs maintained for the taxpayer's benefit.

In effect, what this really means is that you can not contribute to both a Roth IRA and a regular (non-Roth) IRA in the same year. So you may have a decision to make as to the IRA which might be best for you.

In addition: Contributions to Roth IRAs won't be available to higher-income taxpayers. The otherwise allowable Roth IRA contribution will be phased out if your Adjusted Gross Income (AGI) exceeds $150,000 for joint filers and $95,000 for single taxpayers, and will be gone completely when AGI reaches $160,000 (joint filers) or $110,000 (single taxpayers).

Remember: The phase-out ranges for Roth IRAs apply regardless of whether the taxpayer is an active participant in an employer-sponsored retirement plan.

Exclusion for qualified distributions from Roth IRAs: After the 5-year period (explained below), a distribution from a Roth IRA will be tax and penalty-free if it is:

1. made on or after age 59-1/2 or death,

2. made on account of disability, or