ed slott

ed slott & co

ira flow chart


Ed Slott's Free IRA Update

February 2009

Volume 2, Number 2

Click here to view previous issues

In This Issue

• Focus on - Tax Season: Choosing Your IRA Type

• Question of the Month

• News, Rulings and Other Updates

• Retirement Planning Tip

• Ed Slott's IRA Advisor - February Issue




Ed Slott CPA

Ed as a Speaker

Ed Slott's IRA Advisor Newsletter

Shopping Cart

Discussion Forum

Ed's Speaking Schedule




Find an Ed Slott Trained IRA Advisor




















Put today's $10 trillion IRA market to work for you and your clients!

February Focus: Choosing your IRA Type


As many taxpayers get ready to make their 2008 IRA contribution by April 15, some will be faced with the dilemma of choosing between contributing to a Roth IRA or a Traditional IRA. With a Roth IRA, contributions are made with funds from earned income that has already been taxed and qualified distributions are tax-free. With a traditional IRA, contributions are also made with funds from earned income that has already been taxed, but the contributions can be deductible. Earnings in a traditional IRA are tax-deferred until withdrawn from the account. So how does one choose between the two? The best way is to start by process of elimination.


To make the choice easier, start by determining eligibility for the Roth IRA. Individuals whose modified adjusted gross income (MAGI) exceed the limits shown in the chart below are ineligible for a Roth IRA contribution. For these individuals, the choice is simple-since they cannot fund a Roth IRA the only option is to fund a traditional IRA.



Tax Filing Status

2008 MAGI


$116,000 or more

Married filing jointly

$169,000 or more

Married filing separately  

$10,000 or more



Eligible for Both?


For individuals who are eligible to contribute to both a Roth IRA and a traditional IRA, the next step would be to determine eligibility for deduction. Individuals who are active participants in an employer plan are ineligible to deduct their IRA contributions if their MAGIs exceed the following amounts:


Tax Filing Status

2008 MAGI


$63,000 or more

Married filing jointly or a qualifying widower, and active

$105,000 or more

Married filing jointly. Not active, but spouse is active

$169,000 or more

Married filing separately

$10,000 or more


If an individual is eligible for a Roth IRA contribution and is also eligible to deduct a traditional IRA contribution, the choice is not as easy and an analysis should be done to determine which is more suitable. Working with a financial planner who understands retirement planning would be helpful here, as other factors must be taken into consideration. These include tax planning, estate planning and whether the individual will need the assets to finance his retirement.


For individuals who are eligible for a Roth IRA, but are ineligible to deduct the traditional IRA contribution, the choice is easy: fund an IRA which yields the tax-free earnings-the Roth IRA.


If the individual is not eligible for a Roth IRA contribution or a deduction for a traditional IRA contribution, a nondeductible contribution can be made to the traditional IRA. Distributions of nondeductible amounts are tax and penalty free regardless of when they are distributed from the IRA, but the earnings are taxable and subject to penalties unless an exception applies. Note: The individual cannot take out just the nondeductible amounts, as distributions from the IRA are subject to the pro-rata rule and  are deemed to be partly from deductible amounts and partly from nondeductible amounts.


The Choice Can be Changed...


The choice to fund a particular IRA is a reversible one. Individuals who feel that they made the wrong choice when funding their IRA can change the 'flavor' of the contribution through recharacterization. For instance, if an individual makes her contribution to a Roth IRA and later decides that a traditional IRA would have been the better choice, she can recharacterize the contribution to her traditional IRA. The recharacterized contribution must include any net attributable income, and must be completed by the applicable deadline. For individuals who file their returns on a calendar year basis and file their 2008 tax return on time, the deadline is October 15, 2009. Those who file on a fiscal year basis and file their returns on time have a six month extension from the due date for filing their returns.



Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of the content of the newsletter, you can preview past issues before subscribing.


Set yourself apart from the competition, and bring in millions in new IRA rollover business by subscribing to Ed Slott's IRA Advisor Newsletter and attending Ed Slott's IRA Workshops. Click here to see a schedule of upcoming workshops.

Question of the Month

Question: I am ineligible for a Roth IRA contribution, and I also cannot take a deduction for my traditional IRA contribution because I participate in a 401(k) plan and my income exceeds the limit for deducting contributions. I still want to fund my nest egg and have decided to make a nondeductible contribution to my traditional IRA. However, I am concerned that I will be double-taxed on these amounts, as the contribution will be made with funds that have already been taxed and distributions from traditional IRAs are usually taxable. Is there a way I can ensure that I am not taxed twice on these nondeductible contribution amounts?



Answer: Yes. You should file IRS Form 8606 with your tax return for every year that you make a nondeductible contribution or rollover after-tax amounts to your traditional IRA. Form 8606 helps you and the IRS to keep track of the portion of your IRA balance that should be tax-free when distributed. Form 8606 should also be filed for any year that you take a distribution from any of your traditional IRA, SEP IRA or SIMPLE IRA accounts, if you have amounts attributed to nondeductible IRA contributions or rollovers of after-tax amounts in any of your IRAs. Roth IRAs are not counted for this purpose.


Form 8606 includes a built in formula which helps you to determine the portion of your distribution that is taxable (the pro-rata rule).


News, Rulings and Other Updates

  • IRS Extends Deadline for Completing Recharacterization of Conversion: In private letter ruling (PLR) PLR 200903105, the IRS allowed the taxpayer to complete a recharacterization of her Roth conversion, as long as it was completed within 60-days after the PLR was issued. The conversion was completed in 2006, which means that the deadline for completing the recharacterization was October 15, 2007. However, the taxpayer missed the deadline due to misleading information provided by a representative of the IRA custodian. The IRS determined that the reason for the taxpayer missing the deadline was attributed to the financial institution, and granted her the extension. The PLR was issued in 2009, which means the recharacterization will be completed long after the statutory deadline, but will still satisfy regulatory requirements because of the IRS-approved extension.


  • The IRS has issued Publication 4492-B - Information for Affected Taxpayers in Midwestern Disaster Areas, which explains the major provisions of the Heartland Disaster Tax Relief Act of 2008 that apply only to the Midwestern disaster areas. For this purpose, the publication defines a Midwestern disaster area as "... an area for which a major disaster was declared by the President during the period beginning on May 20, 2008, and ending on July 31, 2008, in the state of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, or Wisconsin, as a result of severe storms, tornadoes, or flooding that occurred on the applicable disaster date", and includes a list of affected counties.


The publication explains the special provisions that are available to affected individuals for distributions and loans from retirement accounts, as well as rollovers.



February's Retirement Planning Tip:  Note the tax year on your IRA contribution


When remitting IRA contributions to your financial institution between January 1 and April 15, be sure to note the tax year to which the contribution applies. Many financial institutions have default procedures for applying IRA contributions received during this period, if the taxpayer fails to indicate the applicable tax year. As such, failure to indicate that your contribution is for 2008 may result in the financial institution applying it to 2009. If you have already sent in your contribution, check with your financial institution to make sure it was applied to the correct year.


Highlights from Ed Slott's IRA Advisor Newsletter - February 2009 Issue


The February 2009 issue of Ed Slott's IRA Advisor is now available online. The areas covered include the following:



Top IRA Rulings of 2008 in this issue.
See our 2008 recap from the nation's leading IRA experts.

Also - 2009 brings us the largest ever increase in the federal estate tax exemption (from $2 million to $3.5 million) at a time where most estates have been significantly reduced due to the stock market meltdown. This month's Guest IRA Expert Blanche Lark Christerson, JD, LLM, from Deutsche Bank Private Wealth Management, New York covers critical new estate planning concerns that will affect many of your clients this year.


Feature Article
Top IRA Rulings of 2008

  • 2008 Tax Legislation
  • Court Decisions
  • IRS Notice 2008-30
  • IRS Private Letter Rulings
  • Salvaging 72(t) Payment Plans
  • Saving the Stretch IRA
  • Identifying the Beneficiary
  • Disclaimer Rulings
  • IRA Trust Rulings
  • Congress: Coming Attraction

Guest IRA Expert
Blanche Lark Christerson, JD, LLM Deutsche Bank Private Wealth Management, New York

Estate Planning with the $3.5 Million Exemption

  • The Impact of the Increased Exemption
  • The Clients in the Middle
  • Flex Plans
  • Integrating an IRA
  • Advisor Action Plan

To view current and past issues of the IRA Advisor, click the link below to access our "Subscribers Only" section of our website:
http://irahelp.com/newsletter.php?area=a (for America Online users)

If you do not already subscribe to Ed Slott's IRA Advisor Newsletter, you may do so by clicking here and providing the required information, or by calling 800-663-1340. Each issue is 8 full pages of must-have tax information. Individuals who subscribe to the online version of the Ed Slott's IRA Advisor Newsletter, receive access to back issues at no additional cost.

Ed Slott and Company-100 Merrick Road, 200 East, Rockville Centre, NY 11570
Send comments about this newsletter to [email protected]