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Lee Matthew is a financial planner in Albuquerque. She is an associate of Kathleen Winslow & Associates, LLC, and an investment advisor and Registered Representative offering securities through Financial Network Investment Corporation, a securities broker/dealer (member SIPC). Kathleen Winslow & Associates and FNIC are not affiliated.
biz yourmoney
Sunday, March 5, 2000
Both types of tax-advantaged accounts can help you take care of yourself after retirement
Once again, it's time for the inevitable change of seasons: the end of the flu season ushers in the beginning of tax season.
You may debate which season takes more endurance and optimism to survive, but here's a fact: Tax season is also IRA season, and you now have less than six weeks to make an IRA contribution for 1999.
Let's review the basics: IRA stands for Individual Retirement Account. This type of investment account was developed as an incentive for individuals to put away part of their earned income each year toward retirement. There are two kinds of IRAs -- the Traditional IRA, first established in 1974, and the Roth IRA, created in 1997.
Both Traditional and Roth IRAs permit annual contributions of up to $2,000 ($4,000 for a married couple filing jointly).
Both types of IRAs allow any potential earnings on these contributions to grow free of the burden of annual taxes.
And both types of IRAs allow limited penalty-free withdrawals for qualified education expenses and for first-time home purchases.
There are some differences in how you make contributions to each type of IRA, but the differences are even greater when you are withdrawing from each type of account. Here's a summary of the main features of each type of IRA.
The list of features is by no means exhaustive, so be sure to talk with your financial planner about what type of IRA is best for you and which investments within either kind of IRA are most suitable for you.
Contributions to a Traditional IRA may be tax-deductible, depending on your participation in an employer-sponsored plan and your income level.
The Adjusted Gross Income limit for fully deductible IRAs for 1999 is $51,000 for married couples filing jointly and $31,000 for individuals.
Over the next seven years, these limits will be raised to $80,000 and $50,000. With a Traditional IRA,
any potential earnings are tax-deferred until you make withdrawals from the account.
At that time, withdrawals of tax-deductible contributions and earnings are taxed at current income tax rates. You may make contributions to a Traditional IRA up to age 70, when you must start making required minimum distributions from the account.
The required minimum distributions are calculated using an Internal Revenue Service table of average life expectancies.
Contributions to a Roth IRA are not tax-deductible.
The Adjusted Gross Income limits for full contributions to Roth IRAs are: $150,000 for couples, $95,000 for individuals. Above these limits, contribution amounts are phased out.
So why do a Roth IRA if you can't deduct the contributions?
Because the Roth IRA offers a potentially greater advantage: once the contribution is made, any earnings are tax-free, not just tax-deferred.
In other words, when you take the money out at retirement, you don't pay income tax on the earnings. Depending on your age and the value of your investment, the benefit of potential tax-free growth may exceed the benefit of taking a tax deduction today.
Remember, however, that investment values may fluctuate, and any investment, when redeemed, may be worth more or less than what you paid for it. The Roth IRA offers other advantages, as well.
You may make contributions up to any age, as long as you have earned income.
There are no mandatory withdrawals at any age.
The Roth IRA may also function as a useful estate-planning tool, because distributions to heirs are income-tax free (although the account may be subject to estate tax).
So where do you open an account?
You have lots of choices.
Both Traditional and Roth IRAs may be established at a bank, a mutual fund company, or a brokerage house.
An IRA of any kind is a custodial account that may hold a variety of investments, including money market funds, CDs, mutual funds, or individual stocks and bonds.
So it's probably wise to decide first what investments you want to put into your IRA, and then open the account at an institution that offers you a good selection of suitable choices.
If you have no idea where to begin, consult a reputable financial planner. If you contribute to one type of IRA and then change your mind, you are allowed to move that contribution, plus any earnings, from one type of IRA to another if you do it before your tax filing deadline.
This is called a "recharacterization."
If you're wondering whether you should recharacterize, call your financial planner. In this day and age, providing for your retirement is up to you.
If you don't take care of yourself, who will?
An IRA is a tremendous opportunity to establish a tax-advantaged account that may help build toward your retirement nest egg.
So if you're eligible to contribute to an IRA, do it within the next six weeks.
