Question: Could you explain what the maximum is I can put in my BUYandHOLD IRA? Also, what's the limit for my 401(k)?

Austin

Answer:

Dear Austin,

Good question -- one where everyone who works needs to know the answers ... and the answers are not so simple.

YOUR 401(k)

This year you can save up to $13,000 in your 401(k) or, if you're 50 or older, $16,000. Your contributions to this and most other employer-sponsored plans are pre-tax. That's good news because it means they reduce your taxable income. And, as you probably know, many employers match a portion of your contribution each year, boosting the size of your account even more.

A DEDUCTIBLE IRA

You can deduct contributions to your IRA if: (1) You are not covered by a company plan, including a 401(k) or if: (2) You meet certain income eligibility limits.

Because you have a 401(k), your adjusted gross income (AGI) must be less than $40,000 if you're single or, if you're married, less than $60,000. Singles with an AGI up to $50,000 and married couples with an AGI up to $70,000 qualify for a partial deduction, laid out by the IRS on a sliding scale.

THE ROTH IRA

Contributions made to a Roth IRA are not deductible for anyone. On the other hand, once you turn 59 1/2, earnings in the account can be withdrawn tax free. Another nice break: You do not have to take mandatory withdrawals when you reach age 70 1/2 as you do with the traditional IRA.

You can contribute to a Roth even though you have a 401(k) -- depending upon your income --

• Singles with an AGI over $110,000 and married couples with an AGI over $160,000 cannot contribute to a Roth.
  
  
• Singles who have an AGI between $95,000 and $110,000 and marrieds with an AGI between $150,000 and $160,000 are allowed to contribute, but at reduced amounts on a sliding scale.

THE NON-DEDUCTIBLE IRA

This IRA is designed for people who have a 401(k) or other company plan and who also earn too much to invest in the Roth.

Although contributions are not deductible, the account grows on a tax-free basis. You pay taxes on earnings and dividends only when you make withdrawals.

CAUTION: But be careful and be sure to check with your accountant if you're considering the non-deductible IRA. The new tax cut, which reduced the top tax rate on stock dividends to 15% and on long-term capital gains, also to 15%, may reduce the benefits of this type of IRA for people in high tax brackets.

Why? Because withdrawals will be taxed at one's ordinary income rate, which could be as high as 35%.

FOR MORE INFO:

www.irs.gov