The following questions about Individual Retirement Accounts and Keogh plans have been asked recently by readers (and writers) of The Washington Post. The answers were supplied by the Internal Revenue Service, the Depository Institutions Deregulation Committee and the institutions cited.
Q. As a self-employed person, am I eligible to set up an Individual Retirement Account as well as a Keogh plan?
A. Yes. The same source of income can be used for both. The Keogh should be calculated first, then the IRA.. The maximum Keogh contribution is $15,000 or 15 percent of self-employed income, whichever is smaller. If the 15 percent is under $750, the person can contribute the lesser of $750 or 100 percent of net income.
Thus, for example, if you earned $100,000 from self-employment, you could contribute the maximum $15,000 to a Keogh. You could also contribute $2,000 to an IRA, for a tax-sheltered total of $17,000 that year.
If you earned $10,000, you could contribute $1,500 to a Keogh and $2,000 to an IRA for a total of $3,500. If you earned $1,000, you could contribute $750 to a Keogh. The remainder of the earnings, $250, could be put in an IRA. If you earned $300, you could put $300 into a Keogh.
Q. If my spouse, who is self-employed, earns $1,000 and intends to put it all into a Keogh-IRA account, can I add $1,000 to her account, in addition to my own contribution, so our total is $4,000?
A. No. Each working spouse may contribute only on the basis of what he or she earns.
Q. Am I allowed to deduct initial charges, annual maintenance or custodial fees, charged by some brokers on IRA and Keogh accounts, from my taxes?
A. Yes and maybe. In the case where a broker subtracts a $50 fee from a $2,000 IRA contribution, for example, and credits your account with $1,950, you can take the full $2,000 IRA tax credit. If, however, you contribute $2,000 and the broker bills you an additional $50, you may risk a non-deductible expense. The IRS has not yet ruled on whether you can deduct the $50 under investment expenses or even whether you can deduct the charges when you begin to draw the income. If you want to risk taking the deduction anyway, it obviously makes more sense to do so at the start because of inflation and because you are probably in a higher tax bracket now.
Q. I have decided to divide my $2,000 IRA contribution between two accounts. If I decide to switch both accounts annually, will I be penalized for more than one rollover?
No. The IRS allows one rollover between IRAs every 12 months. A person can withdraw the money and reinvest it within 60 days without having to pay a 10 percent penalty on it. This means one rollover per IRA account, not per taxpayer. So you can transfer your money from each IRA account once during the year without an IRS penalty. Again, the IRS has not finally signed off on this provision, so there is a slight risk this proposed regulation might be reversed.
Q. I am 60 years old and understand that I can move my money from one IRA to another to get the highest interest rate without paying any penalty. Is this correct?
The IRS allows you to withdraw as much or as little as you like without paying a 10 percent penalty. Banks and savings and loans have the option--but not the obligation--to waive the six months forfeiture of interest they must demand when a certificate of deposit is withdrawn or transferred before maturity if the account holder is disabled or over age 59 1/2. This means that each financial institution is free to adopt its own policy, so a prospective IRA account holder must inquire before investing.
Phone calls to a half dozen banks and S&Ls in the Washington area revealed that only two waived any penalty for persons over 59 1/2.Maryland Federal Savings and Loan and First American Bank of Washington said they would allow unlimited transfers before maturity if desired. Using penalty-free transfers, an IRA account holder can upgrade the yield on fixed rate certificates as interest rates go up and lock into maximum yields when rates go down.