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Author: Carpian Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: IRA limits Date: 6/23/2000 4:48 PM
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This has probably been covered on this board before, but with 22,000+ posts...well, you get the idea. I apologize for any redundancy. It hasn't been covered in the last week at any rate.

I've just heard something that sounds incredulous to me, and I want to verify that it's correct. It seems that a person of moderate income who has a retirement plan at work (i.e. 401k) can contribute up to roughly $10,000 per year to their work retirement plan and still also contribute $2,000 to a Roth IRA.

On the other hand, someone who does not have a retirement plan at work (read: someone who really needs their IRAs), if they fully fund a $2000 traditional IRA, they cannot contribute anything to a Roth, and vice-versa. They are limited to $2000 total in their IRA contributions.

Is it just me, or does this not make any sense? For example, I have a friend who was a nun all her adult life and recently left the convent at age 42. She has no savings (talk about someone who needs to start building retirement savings!). She is a teacher, and her school has a 1-year waiting period for 403b participation. So this first year, this person can only contribute $2000 total among her retirement accounts? While those who are in better financial positions can contribute much more? What's up with that?

John
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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22824 of 76418
Subject: Re: IRA limits Date: 6/24/2000 2:56 AM
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<< I've just heard something that sounds incredulous to me, and I want to verify that it's correct. >>

There are a few nuances, e.g. not everyone with earned income can contribute to a Roth IRA, but your major point is correct. Congress is constantly tinkering with these laws, so if you have ideas for changes, let your members know. The just love to hear from constituents, especially in election years.

TMF ExRO
Phil Marti

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Author: Bobbcat Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22828 of 76418
Subject: Re: IRA limits Date: 6/24/2000 10:52 AM
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<<...someone who does not have a retirement plan at work .... are limited to $2000 total in their IRA contributions.

Is it just me, or does this not make any sense? ...While those who are in better financial positions can contribute much more? What's up with that?>>


It's a way to get business owners to setup plans for their employees. With hopefully employer match or employer profit sharing contributions. If they could contribute $10,000/year into their own IRA, why go through the trouble and expense to offer a plan to their employees?

Plans are neither cost-free or trouble free to the employer. Even if "cost-free" by passing through all investment and reporting expenses to the employees, there are still costs in maintaining the paperwork and payroll system.

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Author: Carpian Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22830 of 76418
Subject: Re: IRA limits Date: 6/24/2000 4:57 PM
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Congress is constantly tinkering with these laws, so if you have ideas for changes, let your members know.

Phil,

Thanks for the reply. I have indeed written my congresswoman.

I agree that there should be incentives for employers to offer retirement plans, but for Chrissake, for employees who don't have an employer-sponsored retirement plan, they should at least be able to contribute the standard $2000 to an IRA and still do the Roth.

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Author: Carpian Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22841 of 76418
Subject: Re: IRA limits Date: 6/24/2000 9:44 PM
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One other thing I'd like to clarify, since I'd already had my friend contribute $2000 to both a regular IRA and Roth IRA for this year, since I had no idea this wouldn't be permitted (based on the fact that someone could contribute $10,000 to a 401k and still do $2,000 to a Roth). So it's a done deed at the moment. But can she still have the $2000 go to the regular IRA as a nondeductible contribution?

Thanks,
John

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22846 of 76418
Subject: Re: IRA limits Date: 6/25/2000 6:55 AM
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<< One other thing I'd like to clarify, since I'd already had my friend contribute $2000 to both a regular IRA and Roth IRA for this year, since I had no idea this wouldn't be permitted (based on the fact that someone could contribute $10,000 to a 401k and still do $2,000 to a Roth). >>

I also learned the hard way that it's folly to apply logic to the tax law.

<< So it's a done deed at the moment. >>

That has to be undone, if both contributions were for the year 2000. She needs to withdraw the excess contribution and the earnings on it. She'll have to pay a 10% penalty on the earnings, but will avoid the 6% penalty on the whole thing.

<< But can she still have the $2000 go to the regular IRA as a nondeductible contribution? >>

She can, but if she meets the income restriction on Roth contributions, she'd be crazy to. The advantage of a Roth contribution (no tax ever on the earnings) vs. a nondeductible traditional (tax on the earnings when you withdraw them) is one of the few no-brainers in tax law.

In going back over this before posting I saw another way to interpret this last question. Remember that she is limited to a total of $2,000 in IRA contributions, Roth and traditional combined.

As I often say, contrary to what my mother will tell you, I don't know everything. I think you should tell your friend that you're not really well enough versed in IRA law to guide her. A good place for her to do some reading would be All About IRAs, accessible through the Quick Find dropdown menu at the upper right of this screen.

TMF ExRO
Phil Marti

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Author: Carpian Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22864 of 76418
Subject: Re: IRA limits Date: 6/25/2000 11:58 AM
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In going back over this before posting I saw another way to interpret this last question. Remember that she is limited to a total of $2,000 in IRA contributions, Roth and traditional combined.

Phil,

Thanks for the response. So she can't do $2000 to the Roth, plus $2000 to a regular IRA as a non-deductible contribution? (I did look for this answer in "All About IRAs" but didn't find it.)

That has to be undone, if both contributions were for the year 2000. She needs to withdraw the excess contribution and the earnings on it. She'll have to pay a 10% penalty on the earnings, but will avoid the 6% penalty on the whole thing.

Is this if she withdraws the Roth or the traditional? Or does it matter?

Thanks,
John

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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22870 of 76418
Subject: Re: IRA limits Date: 6/25/2000 2:27 PM
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<< So she can't do $2000 to the Roth, plus $2000 to a regular IRA as a non-deductible contribution? (I did look for this answer in "All About IRAs" but didn't find it.) >>

This is correct.

<< That has to be undone, if both contributions were for the year 2000. She needs to withdraw the excess contribution and the earnings on it. She'll have to pay a 10% penalty on the earnings, but will avoid the 6% penalty on the whole thing.

Is this if she withdraws the Roth or the traditional? Or does it matter? >>

It doesn't matter which one, just as long as the excess (over $2,000 total) contribution and the earnings on it are withdrawn by the due date of her return.

TMF ExRO
Phil Marti

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