Lynn O'Shaughnessy

If you inherit a nondeductible IRA, you won't have to pay federal taxes on the cost basis, which represents all the prior contributions. Suppose a father, for instance, plowed $30,000 into a nondeductible IRA and it ultimately grew to $45,000. The son or daughter would owe taxes only on the $15,000. In contrast, if Dad had left a deductible IRA, the heir would face a tax liability on $45,000.

You, however, can't expect the IRS to alert you to this, and even most tax preparers don't think about it. So how can you tell if you've inherited a nondeductible IRA? One way is to see if the benefactor filed IRS Form 8606 with his or her federal taxes, which shows the amount of a nondeductible IRA contribution. You can also check IRA statements and old federal tax returns to see if tax deductions were claimed for contributions. If they were, the money was intended for a deductible IRA. FYI, one reason why Roth IRAs are so wonderful is because those who inherit these accounts will pay zero taxes on any withdrawals.

Q: I've been told that my wife must stop contributing to her IRA because she's no longer working. Is this true?

A: It's hard enough being a stay-at-home mom - I've been one for 16 years - without facing the galling prospects of passing up the opportunity to save for your own retirement. Luckily, a stay-at-home mother or father can contribute to an IRA as long as the spouse is earning a paycheck that at least equals the IRA contributions.

A mom who's raising the kids can kick in a maximum of $4,000 into an IRA this year or $5,000 if she has already reached the 50-year mark or will this year. The contribution limits are the same as for those who are employed outside the home. To be eligible to make these contributions, however, a couple must file their taxes jointly.

Q: I heard you can have a federal tax refund go directly into an IRA. Is that true?

A: Yes, it is. This is the first year that taxpayers with anticipated refunds will be able to instruct the IRS to deposit their money directly into IRAs. While this sounds likes a great time-saver, you need to anticipate what could go haywire. For instance, what if your refund amount was wrong? Suppose the IRS ended up adjusting your tax return for math errors or for other reasons and the amount is now different. If your refund is increased - hey, it does happen - the cash going directly to your IRA could bust through the contribution ceiling. This would create problems with the IRS.

If you choose the direct-deposit route, make sure you give the IRS plenty of time to channel the money to the right account. You're stuck if the IRS deposits to your IRA after the deadline.

Q: What's the deadline for contributing to an IRA?

A: The federal government is very eager to turn us all into IRA converts, so it has always offered very generous deadlines. This year, you have until April 17 to deposit money into an IRA for 2006. If you haven't already opened an account, you can contact just about any financial institution to obtain the paperwork. To save time, you can also download these forms off the Web sites of most brokerage and mutual-fund firms.

If you've already maxed out your contributions for 2006, go ahead and start on 2007. Bottom line: It's always a good day to feed your IRA.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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