The Carson Report Number 5

THE CARSON REPORT

News for you and your family

Number 5 March, 2003

In This Issue

A Message from Leigh Joy Carson

Traditional IRA c. Roth IRA: Which One Is Right for You?

by Eric T. Weible, UBS Paine Webber Inc.

A Message from Leigh Joy Carson

Dear Friends,

We are pleased to announce that our Spring charity project will be "Games for Giving", a drive to collect new and used toys for children of all ages. We will donate toys and games collected to the Guardian Angel Settlement Association, a group that benefits many families and children in need, irrespective of religious affiliation.

We will have a collection box at the office, and we would be pleased to bring a box to your church or YMCA of office or to pick up any donations. Please tell your friends and neighbors about this drive. All donations are welcome.

We are pleased to welcome Tammy Walsh as our new receptionist. Kate Roselle left us to pursue the opportunity of a lifetime, managing a rock band and living in sunny California.

Tajuana plans to finish her legal assistant degree this year, and we look forward to the expansion of her duties.

We continue to expand our referral list for legal matters outside of family law. We are proud to refer criminal matters, including traffic offenses and driving while intoxicated arrests to Scott Rosenblum and Jenna Glass. Be sure to tell them that we referred you when you call.

Our LISTSERV for discussion of family legal and other issues continues to grow. Go to our website at WWW.THECARSONLAWFIRM.COM and follow the link there to join. We will be posting a new issue for discussion each Friday, and we invite and welcome your input.

We are in the process of adding a "legal news" section to our web page as well, so be sure to bookmark our site and check it regularly.

As always, if you have any suggestions for future newsletters, please let us know!

Leigh Joy Carson

Traditional IRA v. Roth IRA: Which One Is Right for You?

By Eric T. Weible, USB Paine Webber Inc.

(314) 746-4193 ▪ eric.weible@ubsw.com

Whatever you see for yourself for retirement - whether it's work, leisure or something in between - you'll need sufficient funds to ensure yourself and adequate income on which to live. It used to be that most people could rely on Social Security payments to provide for a comfortable retirement. Not so today!

Now more people than ever are responsible for planning and funding their own retirement. And one of the most effective and popular retirement savings vehicles is the individual retirement account (IRA). This article provides an overview of two different types of IRAs - each with its own special features from which you may be able to benefit.

Your savings in a traditional IRA get the benefit of tax-deferred growth until they are withdrawn. Contributions may or may not be tax-deductible depending upon your income level and whether you (and you spouse, if married) are covered by an employer's retirement plan (see below). Although contributions to a Roth IRA are made with after-tax dollars, the savings grow without the bite of current taxes, and, if certain requirements are met, your investment earnings may be withdrawn tax-free.

Let's take a closer look at both the traditional IRA and the Roth IRA.

The Traditional IRA

If you are a working individual under the age of 70, you are eligible to contribute 100% of your earned income, up to $3,000 annually, to a traditional IRA. And if you are age 50 or older, you can make an additional 4500 catch-up contribution. Single income carried couples may contribute 100% of earned income up to $6,000 annually (plus a catch-up contribution, if eligible), although no more than $3,000 ($3,500 if age 50 or older) can be contributed on behalf of any individual each year.

Contributions to a traditional IRA have always been, and remain, tax deductible for:

Single taxpayers who are not covered by an employer-sponsored retirement plan, and
Married couples filing jointly where neither spouse is covered by an employer-sponsored retirement plan

Deductibility for individuals who are covered by an employer-sponsored retirement plan depends on adjusted gross income (AGI).

IRA contributions are fully tax deductible for:

Single taxpayers covered by an employer-sponsored plan, if their AGI doesn't exceed $34,000 in 2002, or $40,000 in 2003, and
Married individuals covered by an employer-sponsored plan, whose joint AGI doesn't exceed $54,000 in 2002, or $60,000 in 2003

Tax-deductibility is gradually phased our as AGI rises above these limits. For example, single taxpayers covered by an employer-sponsored retirement plan cannot claim a tax deduction for an IRA contribution if their AGI exceed $44,000 in 2002 or $50,000 in 2003. Similarly, married individuals covered by an employer-sponsored retirement plan cannot claim a tax deduction for an IRA contribution if their joint AGI exceeds $64,000 in 2002 or $70,000 in 2003. These limits will continue to increase each year according to a specific IRS schedule until they reach $60,000 in 2005 for single investors and $100,000 in 2007 for married individuals covered by an employer-sponsored retirement plan.

If one spouse is covered by an employer-sponsored retirement plan and the other is not (whether a working or non-working spouse), the spouse who is not covered may deduct his or her IRA contribution, as long as the couple's joint AGI doesn't exceed $150,000. A partial deduction is allowed for those with AGI between $150,000 and $160,000. No deduction is allowed where the couple's joint AGI exceeds $160,000. Withdrawals of tax-deductible contributions, as well as all earnings are taxed as ordinary income (withdrawals made prior to age 59 may also be subject to a 10% penalty tax). Investors who do not qualify to make tax-deductible contributions can still contribute up to $3,000 ($3,500 if age 50 or older) a year to a traditional IRA and benefit from the potential of tax-deferred growth.

The Roth IRA

The Roth IRA is similar to a traditional IRA in that earnings grow without being subject to current taxes. Eligible taxpayer may contribute up to $3,000 ($3,500 if eligible) of earned income to a Roth IRA annually. This limit applies in the aggregate, whether contributions are made to a Roth IRA, a traditional IRA, or a combination of the two.

Contributions up to $3,000 ($3,500 if age 50 or older) of earned income may be made to a Roth IRA on behalf of a spouse even if he or she has little or no earned income.

However, the Roth IRA is different from the traditional IRA in several important ways:

Contributions are made only with after-tax dollars. (Since contributions are made after taxes, they can always be withdrawn tax-free and penalty-free).
Income eligibility limits for contributing to a Roth IRA are $95,000 to $110,000 for single taxpayers and $150,000 to $160,000 for married taxpayers filing jointly.
There are no required minimum distributions from the Roth IRA at age 70, as long as there is earned income.
Withdrawals of earnings can be made income tax- and penalty tax-free if the account has existed for at least five years, and any one of the following conditions is met:

Attainment of age 59,
Disability,
The disruption is for the first time purchase of a home up to a lifetime limit of $10,000, or
Due to the death of the accountholder.

Converting a Traditional IRA to a Roth IRA

If you qualify, you may be able to convert your existing traditional IRA funds to a Roth IRA. This conversion of assets from a traditional IRA to a Roth IRA can only be done if the individual or married couple has an AGI of no more than $100,000. In addition, it can only be done on an after-tax basis. Therefore, the account holder must pay ordinary income taxes on the portion of the traditional IRA that is taxable (i.e. deductible contributions and all earning). Since a number of special rules apply, you should discuss this strategy with your tax advisor.

Choosing the IRA That's Right for You

Besides you AGI, there are a number of factors to consider before choosing between the traditional IRA and Roth IRA. They include you age, number of years until retirement, growth rate earned on your investments, as well as your current and anticipated future income tax brackets. Generally, contributing to a Roth IRA is more advantageous than making nondeductible contributions to a traditional IRA. The two accounts are treated similarly in the year a contribution is made (i.e., no deduction is allowed), but upon withdrawal, distributions from the Roth IRA are potentially tax-free, while taxes must be paid on the earnings portion of the distribution from a traditional, nondeductible IRA.

If you are eligible to make both a deductible traditional IRA contribution and a Roth IRA contribution, your situation requires further analysis. Talk to your Financial Advisor about the potential benefits that both types of IRAs offer. Your Financial Advisor can then assist you in conducting the necessary analysis to determine which type of IRA would benefit your unique situation.

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Consult with your tax advisor for assistance with the tax ramifications to help determine which one is right for you.

The Carson Law Firm: Family Law Attorneys -- Serving St. Louis Families for Over a Decade

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