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Greetings, gr8r, and welcome to Fooldom.

<<As a public school teacher, I'm in a fortunate position in that I have the ability to invest through a Tax Sheltered Annuity. Recently I transfered my TSA money out of an account that was bringing in only 6% to one that I was told should get considerably more through aggresive growth funds. Since then I've become interested in opening an IRA in order to invest more foolishly in stocks and index funds. Is it legal to use both a TSA and an IRA to invest simultaneously? If not, I would appreciate any advise as to whether a TSA or IRA would be more beneficial. Thanks! >>

Sure. Anyone under the age of 70 1/2 who has earned income may open an IRA and fund it with up to a maximum of $2,000 per year. The deductibility of those deposits, though, is another issue. You are covered by a retirement plan, the TSA, through your employment. That limits your ability to shelter your contributions to an IRA from the tax man.

Basically, the tax deductibility or IRA contributions depends on your Adjusted Gross Income (AGI), your marital status, and your filing status. For a single taxpayer, up to $2,000 is deductible if AGI is $25,000 or less; part is deductible between an AGI of $25,001 and $35,000; and none is deductible when AGI exceeds $35,000. For a married IRA owner filing jointly with a spouse, a contribution of up to $2,000 is deductible if AGI is $40,000 or less; part is deductible between an AGI of $40,001 and $50,000; and none is deductible when AGI exceeds $50,000. While the IRA contributions we make may be non-deductible, any earnings that money makes is allowed to accumulate within the IRA untaxed until funds are withdrawn from the IRA at some point in the future.

For most of us, at least part of an annual contribution to an IRA is non-deductible. That means we make those deposits with money on which we have paid taxes. When we make such contributions, the IRS requires us to file Form 8606 with our tax return for that year to report them. We should keep a copy of that form as well as the Form 5498 or statement showing the contribution(s) provided us by the IRA custodian. Many years hence, when we begin withdrawing money from the IRA, those documents will prove we made after-tax contributions. Consequently, part of the IRA withdrawal will come back to us untaxed to represent the return of those previously taxed deposits. The rest of the withdrawal will be taxed, and represents the earnings that accumulated tax deferred through the years. The Form(s) 8606 and custodian statements make the job of computing that split much easier to do, and they also prove we made the after-tax IRA deposits. Without them, both tasks are extremely onerous.

I suggest you get and read IRS Pub 590 (Individual Retirement Arrangements) in which all of these issues are explained. You may obtain a copy by calling the IRS at 1-800-TAX-FORM or download it at their website, which can be found at:

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