TIME Congress

Emails Point to IRS Official’s Role in Targeting Conservative Groups

Lois Lerner
Internal Revenue Service official Lois Lerner during a hearing by the House Oversight Committee on Capitol Hill in Washington, May 22, 2013. J. Scott Applewhite—AP

Republicans are urging the pursuit of criminal charges of Lois Lerner after releasing documents showing her involvement in the targeting of conservative groups for special IRS scrutiny

The former IRS official at the center of a scandal over the targeting of conservative groups was directly involved in questioning the tax-exempt status of the groups, according to documents released Wednesday.

The release of emails sent by Lois Lerner was the latest attempt by congressional Republicans to keep focus on the scandal, which briefly buffeted President Barack Obama in the early days of his second term when it was revealed the IRS had closely scrutinized conservative political groups applying for tax-exempt status. The scandal ultimately fizzled without evidence of a connection to the White House and with revelations that liberal groups were also targeted, but Republicans have sought to keep it alive and compel Lerner to testify after she invoked her Fifth Amendment right not to do so.

The tax-writing House Ways and Means Committee on Wednesday sent a formal letter to the Department of Justice detailing what it called Lerner’s wrongdoings and urging prosecutors to pursue criminal charges. Committee Chairman Dave Camp (R-Mich.) said in a statement that the Department of Justice has “a responsibility to act, and Lois Lerner must be held accountable.”

“It is also important that the American people know what really occurred at the IRS, so this powerful agency cannot target American taxpayers ever again,” Camp added.

In 2013, Lerner admitted several conservative groups seeking 501(c) (4) status—which is reserved for social welfare groups that engage in political activity—got special scrutiny, but she denied she was directly involved with the decision making. She instead faulted employees in a IRS office in Cincinnati. But emails released Wednesday show Lerner acted to ensure denials for groups with conservative leanings, particularly Crossroads Grassroots Policy Strategies, a conservative group co-founded by political strategist Karl Rove.

In the emails, Lerner inquired why Crossroads had not been audited by the IRS and later detailed her plans to deny the organization tax-exempt status.“The organization at issue is Crossroads GPS, which is on the top of the list of c4 spenders in the last two elections. It is in the news regularly as an organization that is not really a c4,” one email dated Jan. 4, 2013 reads. “You should know that we are working on a denial of the application, which may solve the problem because we will probably say it isn’t exempt.”

Republicans say this proves that despite a finding by the IRS Administrative Review Board that Lerner didn’t act inappropriately, she is guilty of wrongdoing. The letter, which all Republicans on the committee voted to send, also says Lerner may have exposed taxpayer information by using her personal email to conduct business and providing “misleading statements” to questions from the Treasury Inspector General for Tax Administration.

The committee’s Democrats, 14 of whom voted against sending the letter, dismissed the latest Republican rhetoric as a political ploy. Ranking Democrat Sandy Levin (D-Mich.) said Republicans want to “declare this a scandal and keep it going until November.” The Department of Justice is already investigating the matter.

“I wish I could come up with some other rationale for what you are doing, but I cannot,” Levin said.

MONEY Taxes

Find Hidden IRA Savings

Illustration by Serge Bloch for TIME

These three lesser-known strategies can help you shelter even more income from Uncle Sam.

Tax day is fast approaching, and with it the deadline for one of the best opportunities to juice your retirement savings and cut your tax bill: an individual retirement account.

Unlike most tax breaks, which expire at the end of the tax year, you have until midnight on April 15 to make a 2013 IRA contribution — of up to $5,500, or $6,500 if you’re 50-plus.

Already putting money in? Pat yourself on the back: Only 15% of households saved in an IRA last year, according to the Investment Company Institute. But you may be missing opportunities to sock away even more. And if you’re not participating because you think your income doesn’t allow it? There’s a workaround for that too, which you ought to consider.

After all, the more you can put away in IRAs, the better. “They’re one of the best tax breaks you can take advantage of for retirement,” says New York CPA Ed Slott, founder of IRAHelp.com.

As you may know, contributions to a traditional IRA are fully deductible up to certain income limits — for 2013, $59,000 in modified adjusted gross income for single folks and $95,000 for couples filing jointly. With a Roth — eligibility for which starts phasing out at $178,000 for couples in 2013 — you get no write-off upfront, but get to withdraw funds tax-free in retirement.

In both types, your money grows without the drag of taxes. (President Obama recently announced another IRA for beginning savers, the MyRA.) Maximize these benefits with the tactics that follow, but you may want to hurry. Time’s running out to reduce your 2013 bill.

Save for a spouse

While the IRS says you must have earned income to stash cash in an IRA, there’s one exception: You can put money in on a spouse’s behalf if he or she has no income, so long as you file jointly. “The IRS doesn’t want to penalize a spouse for not working,” says Adam Glassberg, a financial planner in the Chicago area.

A spousal IRA can be either traditional or Roth, with the same contribution allowances. One big, important difference is that contributions made to a traditional spousal IRA are fully deductible up to a higher income — $178,000 in modified adjusted gross — than for joint filers who both have access to a 401(k). Assuming you qualify for that deduction, a $5,500 contribution will shave $1,540 off your 2013 taxes if you’re in the 28% tax bracket.

Stash self-employment income

Do you work for yourself? Or did you do a freelance gig or two on the side last year? The savings opportunity is especially good for you.

You can contribute as much as 25% of net self-employment earnings, up to $51,000 for 2013, to a simplified employee pension plan, or SEP IRA. That’s in addition to the $5,500 you can put in a traditional or Roth IRA, plus the $17,500 you can put in a 401(k) if you have one through a primary occupation. So it’s an especially worthwhile strategy for moonlighters who are already maxing out a workplace retirement plan. Plus, SEP contributions are fully deductible.

“It’s a really valuable way to save and reduce your taxes,” says Newport Beach, Calif., financial planner Dan Thomas.

Use the back door to a Roth

Even if you make too much to write off a traditional IRA contribution, you’re still eligible to stash money in such an account. Without the deduction, a traditional IRA can lag behind a brokerage account invested in index funds or other tax-efficient holdings. But you may still have good reason to open one: A nondeductible IRA allows you to sidestep your way into a Roth if you wouldn’t otherwise be eligible based on income.

You can convert a traditional IRA to a Roth at any time, no matter your AGI. Assuming you have no other IRAs and shift over the funds immediately — before you have gains — you won’t owe any taxes. (If you do have any existing deductible IRA savings, you will owe prorated tax based on the total balance, to essentially pay back the write-off you took upfront.)

Moving to a Roth can be especially beneficial if you think your tax bracket will be the same or higher in retirement. Unfortunately, this strategy won’t help you fend off Uncle Sam this month, but you might be quite thankful 20 years down the road.

TIME Bitcoin

The IRS Will Tax Bitcoin As a Property

The IRS has announced it will categorize virtual money as property, not as currency. The move will impose significant taxes and regulations on the fledging Bitcoin market, but will likely be a boon for investors, since trading profits will be treated as capital gains

The Internal Revenue Service announced on Tuesday that it will categorize virtual currencies like Bitcoin as property, and not as a currency, a move that will impose significant taxes and regulations on the fledging market, but will likely be a boon for investors.

Payments made to employees and workers with virtual currency will be subject to federal income tax, and any payment made using virtual currency will now have to be reported in the same way as other payments made in property.

But any gains investors make from Bitcoin will be treated as capital gains, meaning they could be subject to lower tax rates.

Bitcoin ‘miners’, who verify transactions made with the virtual currency and generate new currency using complex algorithms, will now be forced to pay income taxes on their earnings, as well as payroll taxes to any employees.

Governments are beginning to step up their regulation of Bitcoin as the virtual currency struggles to achieve legitimacy.

TIME Crime

IRS Phone Scam Is The Largest Ever

Thousands of people have lost more than $1 million to scammers who threatened them with arrest, deportation and the loss of business or driver's licenses if they did not make payments through credit cards or wire transfers

A government watchdog says that fake IRS agents have targeted more than 20,000 people in the largest phone scam in the history of the U.S.

Thousands of victims have lost over $1 million to fake IRS agents claiming that people owe more taxes, according to the IRS inspector general. The scammers call up taxpayers demanding that they make payments through prepaid credit cards or wire transfer, threatening arrest, deportation, and loss of business or driver’s licenses if those they scam do not comply.

IRS inspector general J. Russell George says people have been targeted in almost every state, according to the Associated Press.

[AP]

TIME viral

This Man Is Using Selfies as A Weapon To Fight Off The IRS

Instagram / @Internalrevenueselfies

Welcome to the best Instagram of this week

When Andrew Jarvis’ architecture firm opened up shop in New York in 2012 and the man began splitting his time between the city and his home in Philadelphia 49:51, respectively, he became haunted by a nightmare scenario. Since he rented an apartment in NYC, could the big bad New York Department of Revenue come after him to pay additional, steep taxes even though he lived in Pennsylvania? (Not an entirely implausible scenario.)

So Jarvis told TIME that he decided to fight off a hypothetical offensive by IRS auditors with “blizzards of receipts, Easy Pass records, train tickets” … and selfies. The old fashioned kind. At random intervals, Jarvis would program his camera —not camera phone — on an auto-timer, perch it on top of the post at the end of his driveway, put on a business-time face, and take a timestamped picture of himself standing in front of his home with the day’s Philadelphia Inquirer.

But when his social media savvy daughter Anne, 26, came across his camera Friday, the instantly viral InternalRevenueSelfies Instagram was born.

“I came across these photos and I literally had tears running down my cheeks, and I was on the floor laughing” she said. (Andrew had no idea what Instagram was prior to his celebrity.) Anne continued, “What’s so funny is how deadpan he is. He has such an earnest nature. I know where all of this is coming from is he’s just through and thorugh an honest stand-up guy and this is a manifestation of that.”

Andrew had no problem with Anne making the account — he thinks its popularity is proof that she has a good eye —although he doesn’t quite get the humor: “I just created a record as any citizen would do who is trying to be prudent… It’s kind of embarrassing.”

Some photos include props, like snow shovels for winter:

Umbrellas for the rainy season:

Suits when he’s feeling fancy:

And phones when he simply doesn’t have time for all of this:

“I hate to admit this but I sometimes take pictures of myself pumping gas [to prove I'm the one using the credit card at that location],” Jarvis said. “I would have liked to have smiled in a few of the pictures had I known people were going to be looking at them.”

But that might be why the photos have caught on. “No one was ever meant to see these, these were for his future imaginary conversation he might have hypothetically with the IRS,” Anne, who has an eye for design and currently creates window displays at Anthropologie, said. “And seeing that no one was supposed to see them made me want to show the world.”

Jarvis has yet to be flagged by the IRS, but he worries that he might now be tempting his fate: “It’s almost taunting them.” Still, an audit does have a certain ring of appeal. “I kind of wouldn’t mind because I’ve gone through an awful lot of trouble to document it, it would be nice to share it with someone to prove I’ve done my work and have paid my taxes correctly.”

TIME Taxes

Uncle Sam Has $760 Million in Tax Refunds Just Waiting To Be Claimed

If Americans don't claim the money they're owed by April 15, it becomes the property of the U.S. government. The money comes from people who didn’t file tax returns in 2010, but were eligible for tax refunds

Nearly one million taxpayers have left $760 million in unclaimed tax refunds with the IRS, which, if left unclaimed, will soon become government property.

The money comes from people who didn’t file tax returns in 2010 but were eligible for tax refunds, CNN Money reports. Much of the unclaimed money belongs to people who earn so little they aren’t required to file tax returns, but are eligible for refunds through tax credits like the Earned Income Tax Credit. The IRS estimates that more than half of the unclaimed refunds total over $571 each.

The final deadline for filing a 2010 tax return and claiming the money is April 15.

“The window is quickly closing,” an IRS commissioner said in a statement. “We encourage students, part-time workers and others who haven’t filed for 2010 to look into this before time runs out on April 15.”

[CNN Money]

TIME Drugs

Christian Marijuana Dispensary Reconciles Dogma and Dope While Battling the IRS

Bryan Davies, owner of medical marijuana dispensary Canna Care, leads supporters in prayer before facing the Internal Revenue Service in tax court on Feb. 24, 2014.
Bryan Davies, owner of medical marijuana dispensary Canna Care, leads supporters in prayer before facing the Internal Revenue Service in tax court on Feb. 24, 2014. Katy Steinmetz—TIME

"I prayed to the Lord and God said ‘Open up a pot shop'"

Early in the morning on Feb. 24, a large man with a long white beard and big cowboy hat gathered with about a dozen other people to pray outside the San Francisco branch of the United States tax court. In a kettledrum voice, Bryan Davies led the group in the Lord’s Prayer before asking, “If there is any evil here, let it be sent to the lake of fire!” Then Davies strode into the federal building, where he and his wife, Lanette, took on the Internal Revenue Service in a case that could set an important precedent for the nation’s rapidly growing legal marijuana industry.

At issue is a nearly $875,000 tax bill that the Davies’ have refused to pay on the grounds that a 1982 law meant to prevent drug traffickers from deducting business expenses should not apply to Canna Care, their small “Christian-based” medical marijuana dispensary in Sacramento—or any other marijuana dispensary legal under state law. Even if the Davies’ don’t win that argument, there are legal precedents for the dispensary to get a big discount on that bill if owners can prove they’re involved in two trades. So for two days of testimony, the usually staid federal tax court was given over to a detailed examination of what, exactly, constitutes a Christian cannabis business that claims to spend as much time serving the community as it does selling weed-infused lollipops.

The idea for merging marijuana and ministry came through prayer, the couple said during testimony. They had been exposed to medical marijuana when a doctor recommended Lanette Davies’ daughter use it to alleviate symptoms from a bone disease and it “made her life livable,” she said. Bryan Davies became a convert after finding it helped ease an arthritic condition that affects his spine. Trying to live on Social Security benefits and short on cash, Davies says he asked God for guidance. “I got on my knees, and I prayed to the Lord,” he told the court. “And God said … ‘Open up a pot shop.’”

Davies Canna Care

Katy Steinmetz / TIME

The Davies’ set up that shop in 2005, in the back corner of a small industrial complex in a neighborhood of Sacramento called Del Paso Heights. The dispensary is marked only by an illustration of an aluminum can with the word care wrapped across the front. Inside, a security guard mans the door to a windowless lobby. A table offers pamphlets on using medical marijuana to treat chronic pain next to bibles that are given away for free. The walls are a crowded tapestry of American flags, cannabis leaves, eagles, crucifixes and the “Don’t Tread on Me” gear favored by Tea Partiers (though Lanette says she’s a staunch Democrat and Bryan calls himself a libertarian). In the back room, employees sell strains of weed like Hindu Kush, Green Candy and L.A. Confidential, starting at $3.95 per gram.

That work of selling dope, the couple said in response to questioning from IRS lawyers, is consistent with the dispensary’s broader mission to help and heal. A patron might arrive having been diagnosed with Lou Gehrig’s Disease or terminal cancer, Bryan said: “They’ve been told they have so much time to live … and they’re angry with God.” He and other Canna Care employees would often pray with those patients, they testified, in what he said was an attempt to bring them back from the “precipice.” Bryan also said during testimony that he could exorcise patients who “don’t realize they’re hosting a demon.”

Marijuana is an unlikely form of outreach to Christians. A new survey of Americans’ attitudes about marijuana released Wednesday by the Public Religion Research Institute found that the majority of the 3,390 Christians polled, 52%, said they are against legalization. Opposition is strongest among Hispanic Catholics (67%) and white evangelical Protestants (61%), while lowest among Jewish Americans (23%) and the unaffiliated (27%). Robert Jones, CEO of the firm that conducted the survey, partly attributes the opposition among Christians to their view of the body “as a temple” that shouldn’t be soiled with substances like illegal drugs or alcohol or cigarettes.

The Davies’ use the Bible to reconcile selling marijuana with their faith, believing that cannabis was among the “seed-bearing plants” the book of Genesis says God gave man on the sixth day. “You’ve got to remember who created it,” Bryan said recently, shortly after the dispensary employees finished their daily 6 p.m. prayer.

DSC00747

Katy Steinmetz / TIME

Prevailing in tax court will require a different standard of proof. The provision at the heart of the case is an obscure bit of federal tax code known as 280E, which states that taxpayers who are involved in drug trafficking are not allowed to deduct any business expenses—like payroll or rent or health benefits—that would be standard for other legal businesses. The law, put on the books more than a decade before any state legalized medical marijuana, has become an expensive reality for dispensaries; while medical marijuana is now legal in 20 states, and recreational marijuana is legal in two, pot is still a Schedule I controlled substance in the eyes of the federal government. And that means that regardless of state law, all dispensaries are drug traffickers as far as the IRS is concerned.

Canna Care’s disputed tax bill comes from $2.6 million in business expenses that the IRS has disallowed under that code. Getting a ruling that 280E should be revisited and no longer applied to medical marijuana dispensaries, as the Davies’ lawyer argued, would be a landmark decision for the burgeoning marijuana industry. But by the time testimony ended Feb. 25th, that appeared unlikely.

Throughout the two day hearing, the Davies’ were rebuked for using the witness stand as a soap box and rambling rather than giving forthright answers. One of their witnesses was disallowed because the IRS had not been notified of her appearance in advance, and their lawyer could not immediately recall what “THC”—or tetrahydrocannabinol, the mind-altering ingredient in cannabis—stood for. Canna Care employees testified that they did not know how their salaries were determined or by whom. Meanwhile, other attorneys arguing related cases have expressed concerns that a ruling against Canna Care might be “very detrimental” to their efforts to see the code reformed.

A ruling from judge Diana Kroupa may not be forthcoming for at least six months. As testimony ended, Kroupa seemed to acknowledge the shift in popular opinion in favor of legal marijuana, but implied that it would have little bearing on the outcome of a case that hinges, at its core, on an interpretation of fine-grained tax law. “The court is aware that there is a trend,” Kroupa said as the hearing concluded, “but the law is the law.”

Exiting the courtroom, the Davies’ remained upbeat. “I know what we’re doing is the right thing,” Lanette said, “Whether it goes for us or against us, that’s in God’s hands.”

TIME Marijuana

Christian Pot Dispensary Takes on IRS

Some Congress members are advocating marijuana be removed from the federal government's list of hard drugs.
Nick Adams—Reuters

A business touting Christ and cannabis takes a stand over dispensaries' awkward tax status

At Lanette Davies’ shop in Sacramento, everyone stops what they’re doing at 6 p.m. Some patrons come especially for this moment in the day, while others just happen to be there. “We have prayer every night, for our community and our patients,” she says. And those patients are all taking at least one of the same prescriptions: medical marijuana. Her shop, Canna Care, is a “Christian-based dispensary,” where the owners believe in both the powers of Christ and cannabis.

The not-for-profit dispensary has a rare mix of messages, but it might also be on the verge of setting a new precedent for the marijuana industry. On Feb. 24, Davies and her husband Bryan will face the Internal Revenue Service in tax court over disputes about business deductions. A ruling in their favor could help pull dispensaries like hers out of a legal limbo—in which states view them as legitimate businesses but the IRS continues to view them as aiding in drug trafficking.

Federal law defines pot as a controlled substance, and that is the law that the IRS follows, even after 20 states and Washington, D.C., have legalized medical marijuana. “The tax law is grossly unfair,” says San Francisco-based tax attorney Robert Wood, who has written extensively about the issue. “Whether you think dispensaries are a good idea or not, if they’re lawful businesses under state law, they should be able to deduct their business expenses like anybody else.”

So far, courts have ruled that dispensaries can’t do that. Businesses like Canna Care aren’t eligible for what would normally be routine deductions like payroll expenses and rent, because of a section of the federal tax code known as 280E, which dates back to 1982—more than a decade before California became the first state to legalize medical marijuana in 1996. When Davies’ filed her taxes in 2006, 2007 and 2008, she listed $2.6 million in such deductions. The IRS, which has repeatedly pursued dispensaries using that section of the code, came knocking with an audit in 2011 and refused to accept those deductions, levying nearly $875,000 in additional taxes on Canna Care.

As it has with other dispensaries, the IRS offered to settled the case for about $100,000, Davies says, but she refused on principle. “I could have settled this and walked,” she says, “but it would have been morally and ethically wrong to do so.” Davies believes her company is being unfairly targeted while providing a valuable service for people with serious ailments, including her husband and daughter, she says. (Her husband’s chronic arthritis converted them on the subject of cannabis.)

The IRS declined to comment.

Courts have issued rulings that suggest dispensaries are eligible for some tax deductions. In 2007, a California judge ruled that if a medical marijuana dispensary also provides extensive care-giving services, the owner may treat those businesses as separate for tax purposes. In a 2012 case, another California judge affirmed that a dispensary could deduct the cost of goods sold—i.e. the cost of the marijuana. The tax code, the judge ruled, “disallows deductions only for an expense of a business,” like providing health care plans for employees or advertising or legal services, and that does not include product. In this case, the IRS allowed Canna Care to deduct the cost of its marijuana, too.

While Wood sides with the Davies’ in spirit and says “it’s an appealing argument” that dispensaries legal under state law should be taxed like any other business, he says Congress, not the courts, will likely have to make that clarification in the tax code. “What the tax court has done is make sympathetic noises but act as if their hands are tied,” he says.

Davies remains hopeful. “It’s in God’s hands now,” she says.

MONEY

Toxic-Drywall Homeowners Get Tax Relief

Making a bad situation worse for people already hit by the real estate downturn, thousands of Americans are facing the possibility that their homes are the equivalent of toxic-waste dumps. But while the IRS doesn’t usually spring to mind as an organization that comforts the afflicted, the agency recently took action to provide a measure of help to these taxpayers.

At issue are thousands of homes — the vast majority of them in Florida, Louisiana, Mississippi, Alabama, and Virginia — built with corrosive drywall that may be eating away at at the rest of the house and harming occupants’ health. If you’re among those affected, you’ve likely already realized how difficult it can be to get remuneration from insurers or builders. But you can at least count on some relief on your taxes for fixing the problem, thanks to IRS guidance released Sept 30.

Imported from China, the offending material was primarily used within walls and ceilings of homes built between 2006 and 2007, when American-made wallboard was in short supply. Over the past several years, the Consumer Product Safety Commission has logged thousands of complaints from Americans who live in homes constructed with the material, which was recently shown by Lawrence Berkeley National Laboratory to emit higher levels of hydrogen sulfide than other wallboard. Many of the complaints have noted corrosion of metal wiring in the home, as well as of the components in household appliances, creating a possible fire hazard. Consumers have also recounted a rotten egg-like odor, as well as health concerns such as rashes, itchy eyes, asthma and bloody noses.

The Consumer Product Safety Commission, which has been investigating the matter, now advises affected homeowners to remove the wallboard. But the costs to do so are substantial: around $50 per square foot, says Ken Flanz, owner of contracting firm Terre Neuve Corp., which performs the task in Broward County, Florida. Given that the average size house built in 2007, when much of this wallboard was installed, was 2,479 square feet, you’re looking at a final tab of around $125,000. And that doesn’t include the costs to live elsewhere while your home is being torn to its skeleton.

Homeowner’s insurance won’t cover the bill, since policies exclude problems caused by shoddy construction. (Michael Barry of the Insurance Information Institute explains it with this analogy: “If I buy a lemon at the car lot, I don’t file a claim with auto insurer.”) To boot, some insurers are dropping coverage for houses that have the drywall. Homebuilders haven’t been eager to chip in either, resulting in countless lawsuits.

But the IRS’s assistance allows people who are affected to take a casualty loss deduction on schedule A of their 1040 for costs incurred to fix the problem.

As with anything tax related, there are limitations:

• You must take the deduction in the year the costs were incurred — though you may amend returns from the previous three years.

• Your drywall must meet the terms set forth by the CPSC.

• You must itemize to take the write-off.

• You can only write off the loss to the extent that it exceeds two floors: The amount that is above $100, and that is also above 10% of your adjusted gross income. So if your AGI is $100,000, you can deduct the amount of the loss that is in excess of $10,100, says Melissa Labant of the American Institute of Certified Public Accountants.

• If you have a pending claim for reimbursement, either with a builder or via a lawsuit, you can file for only partial reimbursement.

Even with all these caveats, the deduction can be worth quite a bit of money — and it’s certainly more help than homeowners can expect from other sources. A couple with an AGI of $100,000, who live in the average size house built in 2007 and who fixed their drywall, would not owe any federal taxes, says Labant. “The casualty loss,” she says, “would have eliminated their federal liability for the year.”

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MONEY

IRAs Inspire Uneven Loyalty

Only a fraction of Americans contribute to an IRA, but the ones that do tend to take it to the max.

That’s one of the findings from a recent study of 10 million individual retirement accounts conducted by the Investment Company Institute, a mutual fund industry trade organization. The study — which also indicates that women are more likely to contribute to an IRA than men are, that the wealthy are more likely to contribute than the poor, and that people’s contribution activity peaks in their late 50s — illustrates that IRAs can be a powerful tool for retirement, but that benefits aren’t spread evenly throughout the population.

As of 2004, according to IRS figures, about 2 in 10 American taxpayers had a traditional IRA.

Among working-age Americans who do have an IRA, the contribution rates are low, according to the ICI study, which examined data from 2007 and 2008. At the close of 2008, IRAs amounted to more than one-fourth of Americans’ retirement savings, but that year only 9.4% of traditional IRA owners made a contribution. If one includes Roth IRAs, the activity rate increases: In 2007, when 11.2% of traditional IRA owners made a contribution to their accounts, an additional 5.4% of them put all their new contributions into a Roth.

Why is the contribution rate for traditional IRAs so small? The ICI says this could be because of competition from other retirement savings options, such as 401(k) plans and Roth IRAs, or because of limitations on the tax-deductibility of traditional IRA contributions.

And yet the people who do use traditional IRAs are committed to them. In 2007, 60% of contributors in 2007 put in the legal limit. In 2008 — a rotten year for the market, and one in which legal limits increased from the prior year — about 50% maxed out.

That decline in the share of people taking advantage of the legal limit points to another interesting pattern: Many contributors who don’t maximize their contribution are instead depositing a round-number amount that was the maximum allowable contribution in prior years — say, $2,000 or $3,000. It seems that the power of inertia is strong — and that people don’t often bother to check year-to-year and see whether various IRS limitations on retirement-plan contributions changed.

So that you don’t unnecessarily underfund your IRA, check out the IRS rules for 2010 limits. You can also visit the IRS site for in-depth information about Roth IRAs and guidelines for 401(k) plan contributions.

To shed further light on investor behavior, the ICI promises more IRA-account-behavior studies, which, like this one, will be mined from a new database it developed with the Securities Industry and Financial Markets Association.

In the meantime, tell us about your own IRA behavior. Do you contribute to a traditional IRA or a Roth? Are you maxing out your contribution? Tell us why or why not.

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