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Don't
Overlook IRAs
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.¹
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 70½.²
Distributions from Roth IRAs, on the other hand, are free of federal income
taxes, and withdrawals of contributions can be made at any time.³
Traditional
and Roth IRAs are flexible retirement savings tools that can play a number of
roles in your portfolio. Please call if you would like to discuss IRA or
rollover options.
1)
Investment News, September 13, 2004
2) Withdrawals from traditional IRAs prior to age 59½ may be subject to a 10
percent federal income tax penalty plus ordinary income taxes.
3) 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 due to 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.
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