Lee F. Holdmann Chartered

Client Alert - March 17, 2008

                                                     March 17, 2008

                                New IRA Rules: New Planning Opportunities

It is rare that a savings and investment tool comes along which has been cobbled together out of tax rules. Ironically, we have one now, at a time when stocks and real estate are giving pause to investors. We will discuss this new planning tool as well as list the important changes to the IRA laws. Finally, we have included on the last page our IRA OVERVIEW chart which details the dollar and age limitations. Much of the material in this Alert will also demonstrate planning opportunities for your children or grandchildren. Feel free to share this Alert with them.

Starting Now to Build Your Roth IRA

Suppose you are covered by an employer's retirement plan, and the adjusted gross income (AGI) limitations prohibit your making deductible contributions to a traditional IRA. So you make deposits in safe, interest-yielding accounts now and over the next year and a half. These can be made as nondeductible contributions to a traditional IRA account.

Then, in 2010 when the AGI limitations are removed as a result of the 2006 law change, you can convert that traditional IRA to a Roth IRA. No tax will be paid on the contributed deposits; only the investment earnings will be taxed. Unlike traditional IRAs which grow on a tax-deferred basis, Roth IRAs grow tax free, can be withdrawn (subject to timing restrictions) without any income taxes, and are not subject to the minimum required distribution rules for the account holder or spouse.

Therefore, a single taxpayer who is precluded from making deductible contributions to an IRA can make nondeductible contributions for 2007, 2008 and 2009 totaling $14,000 plus. A married couple can contribute $28,000 plus. If the taxpayers were age 50 or more in 2007, the single taxpayer's amount increases to $17,000 plus and the married couple's to $34,000 plus.

When 2010 arrives, these taxpayers can convert to Roth IRAs paying income taxes only on the interest earned or growth on the accounts. The new laws permit this tax to be paid over two years - 2011 and 2012.

This planning strategy is most effective for taxpayers who have no other IRAs or who have only nondeductible IRAs. This is because of the rule that requires Roth conversions to be allocated proportionately between existing deductible and nondeductible IRAs. You are not permitted to pick and choose which portion of traditional IRAs are being converted.

Consequently a taxpayer who has deductible IRAs and nondeductible IRAs of equal amounts who converts one-half of the total IRA funds to a Roth in 2010, will have to apportion half of the converted amounts to the deductible IRA funds and pay income taxes accordingly. The other half will be apportioned to the nondeductible funds and receive the tax benefit, but only for that one-half. Thus, if you have both deductible and nondeductible IRAs, any conversion using funds from either or both types will be treated as if it came proportionately from both types and will be taxed accordingly.

Careful Attention to Detail Required

To achieve the benefits available in the new IRA rules, it is important to exercise caution. In addition to the complexity in the regular IRA rules, recent changes can be confusing. For example, the law changes have some surprising new benefits and a number of rigid timing, earnings, and income limitations. There is an absolute deadline of April 15, 2008, for 2007 contributions to a deductible or nondeductible IRA. No extension of that deadline is available even if a return filing extension is taken.

Law Changes

1. Special treatment is now provided for military personnel. Nontaxable combat pay may now be counted as compensation to allow IRA contributions. This law change made by the Heroes Earned Retirement Opportunities Act was made retroactive to include pay for 2004 and later years. Thus combat personnel and veterans may make contributions for 2004 and 2005 any time before May 29, 2009, and file amended returns.
2. Another benefit for the military provides an exemption from the 10% early-distribution tax for active duty reservists.
   
3. In 2008, investments in a 401(k) plan can be rolled over to a Roth IRA, provided the 401(k) plan meets certain requirements. Tax will be due and payable for the year of the rollover unless the amount is being rolled over from a "Roth 401(k)."
   
4. Traditional IRA contributions can be made for 2007 as long as they are identified as 2007 contributions and made no later than April 15, 2008. The contribution can be $4,000 per person (plus $1,000 for a taxpayer who is age 50 or older on December 31, 2007). To qualify for this contribution you must have wages or earned income from services equal to or exceeding the contribution amount and be under age 70 ½ on December 31, 2007.
   Furthermore, active participants in employer-sponsored plans can qualify the contributions as deductible IRAs only if they meet the AGI test. If you are unmarried and have AGI over $52,000, the deduction will be phased down and out between $52,000 and $62,000. For a married couple, the phase out occurs between $83,000 and $103,000. A special rule allows the non-working spouse to make a deductible contribution if the combined AGI is under $156,000.
   
   ((Caution: A return filing extension will not extend the contribution deadline.))
   
   
5. In 2008 the contribution amount increases to $5,000 (plus $1,000 for taxpayers age 50 and over). The AGI phase-out for participants in other plans begins at $53,000 for single persons and $85,000 for joint filers. The special rule for non-working spouses increases the combined AGI limitation to $159,000.
   
6. In 2009 and later years the contribution limit of $5,000 will be adjusted for inflation.
   
7. Excess contributions - that is, those exceeding the $4,000 or $5,000 or $6,000 limitations - will be subject to a 10% penalty tax. The tax can be avoided, however, if the excess amount is withdrawn by the regular due date of the tax return. See paragraph 2 above for the special break provided for military reservists on active duty.
   
8. Even though a taxpayer is actively participating in another plan and fails to meet the AGI limitation which precludes a deductible contribution, that taxpayer can still make an nondeductible contribution to a traditional IRA. The rules set forth above in paragraphs 4, 5, and 6 for earnings, age qualifications, and contribution limits continue to apply for nondeductible contributions.
   
9. Roth IRA contributions can be made for 2007 (again subject to the April 15, 2008, deadline) if AGI is under $99,000. For joint return filers, it is $156,000. In 2008, the AGI limits are increased to $101,000 for single filers and $159,000 for joint filers. Conversions to Roth IRAs can be made for 2008 and 2009 only if the AGI is under $100,000; this $100,000 limit applies for a single taxpayer as well as for a married couple.
   
10. Commencing in 2010, there will no longer be AGI limits for traditional IRAs, Roth IRAs, or Roth conversions. Any tax resulting from a Roth conversion in 2010 will be permitted to be paid over two years.

We hope this Alert has provided you with useful information.

             Sincerely,

              LEE F. HOLDMANN, CHTD.


Copyright 2008. Lee F. Holdmann, Chtd. Bethesda, MD. This Client Alert is not intended as legal or tax advice.
For your specific problems or legal and tax matters, you should consult a qualified attorney or tax advisor.

Contribution Limits:	2007	2008	2009	2010
Basic	$4,000	$5,000	$5,000 inflation adjusted	$5,000 ------->
Make-up (50 or older)	$1,000	$1,000	$1,000	$1,000
Married couple can combine earned income	$8,000	$10,000	$10,000 inflation adjusted	$10,000 ------->

Adjusted Gross Income Caps and Phase-out:

Single taxpayer	$52,000- $62,000	$53,000- $63,000	Inflation adjusted	None
Married filing jointly - both active participants	$83,000- $103,000	$85,000- $105,000	Inflation adjusted	None
Married individual - other spouse active participant	$156,000-$166,000	$159,000-$169,000	Inflation adjusted	None
Roth IRA - single taxpayer	$99,000-$114,000	$101,000-$116,000	Inflation adjusted	None
Roth IRA - married filing	$156,000-$166,000	$159,000-$169,000	Inflation adjusted	None
Roth conversion - single taxpayer	$100,000	$100,000	$100,000	None
Roth conversion - married	$100,000	$100,000	$100,000	None

Age Limitations:

Make-up IRA contribution of $1,000 if by end of year taxpayer is age	50
Option to take traditional IRA distributions if taxpayer during year reaches age	59 1/2
Contributions to traditional IRAs (deductible or nondeductible) prohibited in years including and following taxpayer's reaching age Exception: Roth IRA contributions can be made at age 70 1/2 and for later years.	70 1/2
Minimum required distributions required from traditional IRAs, SEP IRAs and for qualified plans for five-percent-or-more owners of the business beginning at age 1st Exception: a non-five-percent business owner must start minimum required distributions at the later of age 70 1/2 or upon retirement. 2nd Exception: Roth IRAs are not subject to the minimum required distribution rules for the Roth IRA participant or the participant's spouse.	70 1/2