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Individual Retirement Accounts

Individual Retirement Accounts (IRAs)

An individual retirement arrangement, or IRA, is a personal savings plan that allows you to set aside money for retirement while offering you tax advantages. There are four basic types of IRAs:

  1. Traditional IRAs, which usually offer a tax deduction for the tax year in which you contribute, plus the opportunity for your earnings to grow tax-deferred until you withdraw them;
  2. Roth IRAs, which offer no immediate tax deduction but generally allow you to withdraw the money you have accumulated in the account tax-free during retirement;
  3. SEP-IRAs for self-employed workers; and
  4. SIMPLE IRAs, which are established by very small companies for their workers.

In order to contribute to your own traditional or Roth IRA, you must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Taxable alimony and separate maintenance payments also will count as compensation. Note, however, that if you (or your spouse) are covered by a retirement plan at work, your ability to deduct your contributions to a traditional IRA may be limited, depending on your compensation level.

Visit the IRS site to see how much can contribute to your IRA. If you qualify, the maximum contribution in 2008 is 100% of your compensation up to a maximum of $5,000, plus an additional $1,000 if you have reached age 50.

These contribution limits are the same for traditional and Roth IRAs. If you qualify for both kinds of IRAs, you can divide your contribution any way you like between the two, as long as the total of all contributions does not exceed $5,000.

How do I set up an IRA?

It's easy. Most investment companies, banks and insurance companies will be happy to help you set up an IRA. Some will waive the minimum account requirement if you agree to have a fixed amount transferred from your bank account each month to the IRA. You then will have your choice of investment options, depending on the financial institution, including mutual funds, stocks, certificates of deposit and other investments. A Web search for "start an IRA" will lead you to information about companies that can offer you an IRA. The deadline for making a contribution to a traditional or Roth IRA for the year is the due date of your return, not including any extensions of time to file.

What about an IRA for my spouse?

IRAs cannot be owned jointly by you and your spouse. But if there are any amounts remaining in your IRA when you die, they will be paid to the beneficiaries you designate.

However, if both you and your spouse work, have taxable compensation and you file a joint income tax return, each of you can contribute to a separate traditional or Roth IRA (if you qualify), up to the limits set by the IRS. Even if one spouse does not work, you may be able to make a contribution to a separate IRA for your nonworking spouse as long as you file a joint return. Note that you cannot contribute to a traditional IRA beginning in the year in which you attain age 70½; however, there is no age limit for contributing to a Roth IRA.

Should I convert my IRA to a Roth IRA?

If you like the idea of tax-free income in retirement, you may be wondering if you should convert a traditional IRA to a Roth IRA. If you qualify to make the conversion, you would pay income tax in the year of the conversion on the value of the amount you convert, but, after five years (and meeting certain other requirements), you can qualify to receive tax free distributions of the original amount and any earnings from your account at retirement.

Tip: As part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), Congress has created a special opportunity for converting a traditional IRA to a Roth IRA in 2010. Anyone, regardless of income, may convert a traditional IRA to a Roth IRA in 2010 and choose to either include the entire conversion in their income in 2010, or include the income from the conversion over the next two years, 2011 and 2012. You may want to discuss this option with your tax advisor now to determine how it can benefit your retirement planning.

Keep in mind that you must take distributions from a traditional IRA beginning in the year you attain age 70½. There is no such requirement with regard to the Roth IRA.

Retirement Planning Calculators

Calculators

Is my IRA contribution deductible?

IRA Deduction Limits for 2008 (if you are covered by a retirement plan at work)
If you are covered by a retirement plan at work, use this table to determine whether your modified Adjusted Gross Income (AGI) affects the amount of your deduction. Even if you cannot take the deduction, you still are able to make the contribution.
IF your filing status is ... AND your modified adjusted gross income (modified AGI)1 is ... THEN you can take ...
single or head of household $53,000 or less a full deduction.
more than $53,000 but less than $63,000 a partial deduction.
$63,000 or more no deduction.
married filing jointly or qualifying widow(er) $85,000 or less a full deduction.
more than $85,000 but less than $105,000 a partial deduction.
$105,000 or more no deduction.
married filing separately 2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
1 Modified AGI (adjusted gross income) is defined in IRS Publication 590.
2 If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the "Single" filing status).

If you are contributing to an IRA for a spouse who is not working or one who is working but is not covered by a retirement plan at work, and you are filing a joint return, and you are covered by a plan, different income limits will apply for determining the income tax deduction for your spouse.

Roth IRAs are made with after-tax money and are not deductible. This table shows how much you can contribute to a Roth IRA based on 2006 limits.

Roth IRA Contribution Limits for 2006 and 2007
IF you have taxable compensation and your filing status is ... AND your modified AGI is ... THEN
married filing jointly or qualifying widow(er) less than $159,000 you can contribute up to $4,000 ($5,000 if you are age 50 or older).
at least $159,000 but less than $169,000 the amount you can contribute is reduced, as explained in contribution limit reduced.
$169,000 or more you cannot contribute to a Roth IRA.
married filing separately and you lived with your spouse at any time during the year zero (-0-) you can contribute up to $4,000 ($5,000 if you are age 50 or older) as explained under how much can be contributed.
more than zero (-0-)
but less than $10,000
the amount you can contribute is reduced, as explained in contribution limit reduced.
$10,000 or more you cannot contribute to a Roth IRA.
single, head of household or married filing separately and you did not live with your spouse at any time during the year less than $101,000 you can contribute up to $4,000 ($5,000 if you are age 50 or older) as explained in how much can be contributed.
more than $101,000 but less than $116,000 the amount you can contribute is reduced, as explained in contribution limit reduced.
$116,000 or more you cannot contribute to a Roth IRA.

The above information is educational and should not be interpreted as financial or tax advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

To do:

Identify an IRA plan that fits your needs and can start contributing today!

 

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