IRA assets have grown at an average annual rate of 13 percent since 1990, topping the $3 trillion mark in 2003. Though these numbers are impressive, it’s important to note that the growth has come primarily from rollovers and market performance rather than additional IRA contributions, according to an Investment News article.
Why aren’t people utilizing IRAs more effectively? Perhaps the reason lies in increased complexity and confusion about IRA eligibility and deductibility. In an era where people are concerned about future Social Security benefits and outliving their income, it can be costly to overlook the tax benefits and tax deductibility of IRAs.
Who can contribute?Anyone under age 701/2 with earned income can contribute to a traditional IRA. Although age is not a limitation with a Roth IRA, contributors still must have earned income, and total income cannot exceed certain levels:* $160,000 if married filing jointly*$110,000 for single or head of household (also married filing separately if spouses did not live together during the year)
How much can be contributed?The combined amount that individuals can contribute to traditional and Roth IRAs in 2005 has increased to $4,000 ($4,500 for those aged 50 and older). Increases in contribution limits are scheduled through 2008.
How much is deductible?Contributions to traditional IRAs may be fully or partially deductible, and you can deduct more of your contributions today than ever before. The amount you can deduct will depend on your income, age, and participation in an employer-sponsored retirement plan. Contributions to Roth IRAs are not tax deductible.
Even if you can’t deduct traditional IRA contributions in a given year, you can take advantage of the tax-deferral benefits of IRAs.
What about distributions? Withdrawals from traditional IRAs are subject to ordinary income taxes, and required minimum distributions must begin once you reach age 70½. Withdrawals from traditional IRAs prior to age 59½ may be subject to a 10 percent federal income tax penalty plus ordinary income taxes.
Distributions from Roth IRAs, on the other hand, are free of federal income taxes, and withdrawals of contributions can be made at any time. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or because of death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Before taking any specific action, be sure to consult with your tax professional.
Traditional and Roth IRAs are flexible retirement savings tools that can play a number of roles in your portfolio.