Can you believe that individual retirement accounts (IRAs) have been helping individuals save for retirement for more than 30 years? These accounts extend the tax advantages of employer-provided retirement plans to many people who either don't have retirement plans at work or who want to supplement their other plans.
Since their inception, however, IRAs have changed in many ways, including restrictions on who can contribute, as well as the types of accounts you can contribute to. Given this evolution, you may not be familiar with all the options and benefits available to you. To help bring you up to speed, we'll highlight three primary types of IRAs:
- Nondeductible IRAs
- Deductible IRAs
- Roth IRAs
The one thing that remains consistent, regardless of the type of IRA, is the contribution limit allowed. In 2007 it is $4,000 ($1,000 more if you are age 50 or older); in 2008, the limit increases to $5,000.
Nondeductible IRAs
This IRA is perhaps the simplest to understand - you contribute after-tax income to the IRA, and your assets grow on a tax-deferred basis. When the money is withdrawn, you don't have to pay taxes on your original contribution, but any earnings will be taxed at your ordinary income tax rate at that time.*Nondeductible IRA owners are required to take minimum distributions starting at age 701/2.
Deductible IRAs
This type of account has more variables for consideration than the nondeductible IRA. Individuals meeting IRS deductibility requirements can deduct any IRA contributions from their income tax purposes. In addition, earnings in the account accumulate on a tax-deferred basis. So, when you meet a qualifying event, your total distribution amount will be fully taxable at whatever your marginal tax rate is at that time. *Deductible IRA owners are required to take minimum distributions starting at age 701/2.
Roth IRAs
Roth IRAs, which were introduced in 1998, allow for after-tax contributions, as well as potentially tax-free distributions when you meet a qualifying event. The IRS has set specific eligibility requirements for individuals to contribute, but those who are eligible benefit from tax-free access to their contributions at any time. *Roth IRA's are generally considered the most tax-advantageous of the IRA options, and they can play a significant role in your retirement savings strategy. Roth IRA owners are not required to take distributions.
As the end of 2007 approaches, it may be helpful for you to use IRAs to your maximum advantage. As a starting point, you should first evaluate whether you are eligible for a Roth IRA this year. If you are, we hope you seriously consider making a contribution. If, however, your income level makes you ineligible for a Roth IRA, a traditional IRA may be best for you.
We'd be happy to help you evaluate which IRA makes the most sense for your individual needs. Please feel free to call us to discuss or schedule an appointment.
*Withdrawals of taxable amount are subject to ordinary income tax and, if made before age 591/2, may be subject to an additional 10% federal income tax penalty.
Sincerely,
Axial Financial Group
