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Other Articles
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IRA
Individual Retirement Account: "Retirement" is Its Middle Name
By Thomas Kane
Financial Advisor, Raymond James Financial Services, Inc.
Individual retirement accounts are appropriate for any wage earner or self-employed person who plans to retire, can afford to give up ready access to the funds invested, and requires savings outside Social Security and employer-sponsored plans. In essence, IRAs can work for just about anybody.
Over the past several years, IRAs have undergone sweeping changes. The end result of the passage of the recent tax and budget legislation is the encouragement of increased savings… and much of this directly affects retirement savings through IRAs.
Because of changes, primarily in the expansion of IRA options, individuals who do not presently have a planned investment program for their retirement may want to consider implementing one in order to take advantage of these opportunities, as well as future changes.
The following chart demonstrates the importance of taking advantage of savings opportunities as soon as possible.
Traditional IRAs
The traditional IRA is a tax-favored, flexible retirement planning tool. And with the recent legislation, tax deductible contributions to traditional IRAs have been expanded. Each individual is now able to set aside up to $4,000 for 2005 through 2007. Individuals who have attained age 50 or over are permitted to set aside an additional $500 for 2005 and $1,000 for 2006 and 2007. Many individuals may be able to fully deduct these contributions on their federal income tax return.
If the investor or his or her spouse is covered by an employer retirement plan, the IRA deduction may be limited depending on Modified Adjusted Gross Income (MAGI). As income rises above a certain amount, the deduction begins to decrease and is eliminated entirely when income reaches a certain amount.
A higher-earning spouse may contribute to an IRA for the benefit of a non-working or lower earning spouse as long as they file a joint tax return and the total annual contributions for both spouses do not exceed 100% of their combined earnings.
Penalty-free distributions may be made from an IRA for several purposes. Distributions are also permitted without the 10% early distribution penalty for first-time home purchases and for education expenses incurred by the investor, and his or her spouse or dependents. The availability of penalty free distributions makes the traditional IRA a key retirement planning tool, which lends much more flexibility than similar savings methods when planning to meet cash flow needs.
Roth IRAs
A Roth IRA is subject to the same contribution limits as the traditional IRA. However, unlike contributions to a traditional IRA, contributions to a Roth IRA are not deductible. For 2005, an individual may make a non-deductible Roth IRA contribution of up to $4,000; plus, if age 50 or more, the $500 catch-up contribution (less contributions to any traditional IRAs). As with the traditional IRA, ability to make Roth IRA contributions is subject to phase-out based on income limits.
The earnings within a Roth IRA accumulate tax-deferred. When a distribution is made from a Roth IRA, it will be tax-free and penalty free if it is a qualified distribution. A distribution is qualified if the Roth IRA has been in effect for at least five years and at least one of the following has been met: the investor has attained age 59 1/2, died or become disabled or makes a qualified first-time home purchase.
The Required Minimum Distribution (RMD) rules do not apply to the Roth IRA during the life of the original investor. The investor does not have to begin withdrawing funds from his Roth IRA upon attaining age 70 1/2. The RMD rules do apply, however, to a beneficiary who inherits a Roth IRA at the death of the original investor.
A traditional IRA may be rolled over (or simply put, converted) into a Roth IRA if an individual’s modified adjusted gross income (MAGI) is not above $100,000. The $100,000 MAGI limit is determined without regard to the rollover amount and is applied to single filers and to married persons filing jointly. Beginning in 2005, the $100,000 MAGI limit is determined without regard to any RMDs taken from the traditional IRA.
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