by Archie M. Richards, Jr., CFP^®
November 17, 2003

Sharon writes, "I am contributing 13 percent of pay each year to a government retirement account (called Thrift Savings Plan or TSP ). Can I still contribute $2,000 annually to a separate IRA? How would I do that?

If you qualify, Sharon, you can contribute $3,000 a year to an IRA, not just $2,000. If you're over 50, make that $3,500.

Traditional IRA: Since you're already participating in a qualified retirement plan, figuring out how much you can contribute to a Traditional IRA requires an understanding of Modified Adjusted Gross Income (referred to as MAGI for short).

Start with the number at the bottom of page 1 of income tax Form 1040. That's your Adjusted Gross Income (AGI). Then exclude the following deductions and exclusions:

• IRA deduction
• Foreign earned income exclusion
• Foreign housing exclusion
• Student loan interest deduction
• Savings bond interest exclusion for qualified educational expenses
• Exclusion of employer-paid adoption expenses
• Deduction for qualified tuition and related expenses

Removing these items increases modified AGI, making it harder to qualify for IRAs.

Okay, here are the deductions for contributions to a Traditional IRA when you're also participating in a qualified retirement program. If your MAGI is $54,000 or less, you can deduct $3,000 (or $3,500). As your MAGI grows from $54,001 to $64,000, the deduction is gradually reduced to zero. At $64,000 and above, no deduction. These numbers apply whether you're married or not.

If you're not a participant in a qualified retirement plan, you can deduct the full $3,000 (or $3,500) no matter how high your income.

Roth IRA: Contributions to a Roth IRA are not deductible. How much you can contribute depends on your magical MAGI. It makes no difference whether you're a participant in a qualified retirement plan.

If you're single and your MAGI is $95,000 or less, you can contribute up to $3,000 (or $3,500) to a Roth IRA. From $95,001 to $110,000, the maximum contribution gradually falls to zero. Above $110,000, no contributions are permitted.

If you're married and filing a joint return and your MAGI is $150,000 or less, you can contribute up to $3,000 or $3,500 to a Roth IRA. From $150,001 to $160,000, the maximum contribution gradually falls to zero. Above $160,000, no contributions at all.

More IRA Tidbits: If you have both a Traditional IRA and a Roth IRA, you can contribute in any tax year no more than $3,000 (or $3,500) between the two plans.

The earnings of investments within all IRAs are not taxed as long as the money remains undistributed in the IRA.

Distributions from Traditional IRAs are taxable, and they must begin in the year you turn 70½. (The rules are complicated. What else did you expect?)

Distributions from Roth IRAs are not taxable and are not required at any age.

If the members of Congress think all this complexity is helpful to anyone except high-paid tax experts, they're nuts! Why don't they just cut tax rates and knock off all these IRA and pension plan loopholes? Jeeess!

To find out more about all this, visit www.Vanguard.com.Click on "Personal Investors." Click on "Services." On the left side, click on "Retirement Investing Services." Or just call 800-523-7731.

Don't expect a will to control the disposition of your IRAs, pension plans, annuities, or life insurance policies. At your death, those assets pass to whomever you've specified as beneficiaries in the plans. If you've remarried, for example, change the beneficiaries pronto!

Also specify secondary beneficiaries - the person or persons who inherit if the initial beneficiary dies before you.

Making your estate the beneficiary creates probate problems. Making your living trust the beneficiary is probably okay. Check with your estate planner.

Your will has no effect on the disposition of these plans. If you have IRAs, check with the trustees. For the pension plan, contact your company. For your annuities and life insurance policies, call the insurance companies. Make sure the beneficiaries are the right people.