This is the most common form of a tax-deferred retirement
plan. It is personal rather than company-sponsored. Even in
retirement, you may be able to contribute as much as $4,000 ($5,000 if age 50 or older) of
earned income to an IRA each year. The amount is increased to
$8,000 ($10,000 if age 50 or older) if you are married and your spouse does not have an income.
The limit increases to $5,000 in 2008. Thereafter, the contribution limit will be indexed in increments of $500.
The 1986 Tax Reform Act limited the deductibility of IRA
contributions for some taxpayers depending on their income and
their participation in an employer's retirement plan. With a
traditional IRA, earnings are not taxed until they are withdrawn
which must begin by age 70-1/2.
You have control over how your IRA funds are invested. If
you continue to meet Internal Revenue Services' guidelines,
changes you make in the way your money is invested will remain tax deferred.
In 1997, the Tax Relief Act established two new IRAs:
A Roth IRA is unlike the traditional deductible IRA. With a traditional IRA, you may deduct contributions from your taxable income (within limits and only if you satisfy certain requirements), but all withdrawals are fully taxable.
With a Roth IRA, you receive no up-front deduction for annual contributions. But, if you meet the rules of the tax law, you may withdraw money from a Roth IRA tax free and owe no tax on the account's earnings provided you are at least age 59-1/2 and have held the Roth IRA for five years or more.
A Roth IRA can be started at any age as long as you are otherwise eligible. That's one reason a Roth IRA also has become an estate-planning tool. Unlike a traditional IRA, contributions to a Roth IRA may be made even after age 70-1/2.
Roth IRAs provide an opportunity for retirees to invest a portion of their discretionary income in additional retirement savings, provided the contribution is earned income from full- or part-time work. Contributions still cannot exceed $4,000 of earned income annually in 2005-2007 ($8,000 with a non-working spouse).
A traditional IRA can be rolled over into a Roth IRA. However, you should consult a financial advisor about the feasibility of doing this since any taxable amounts that you transfer in this case must be included in your income for tax purposes.
Education IRA
An Education IRA (now called the Coverdell Education Savings Account) is not for retirement savings. Instead, it offers a way to help you save for a child's higher education expenses.
Anyone — parents, grandparents, aunts, uncles, friends — can open an Education IRA for any designated beneficiary under age 18. More than one person can contribute to an Education IRA, but the total of all annual contributions must not exceed $2,000.
This special IRA can be used to pay for tuition, fees,
books, supplies, equipment and room and board if the beneficiary
is at least a half-time student. Contributions are not tax
deductible, but withdrawals are tax free as long as they do not
exceed the beneficiary's education expenses.
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