Investing for Retirement with IRAs

AMES, Iowa -- An individual retirement account, or IRA, is an easy way to save for retirement. While not everyone has a retirement plan available through their employment, anyone with earned income can set up and contribute to an IRA, according to Pat Swanson, CFP® and families specialist with Iowa State University (ISU) Extension’s Invest Wisely Project (www.extension.iastate.edu/investwisely).

“It’s not too late to make your contribution for the 2007 tax year. You have until April 15 of this year,” Swanson says. “The maximum contribution for the 2007 tax year is $4,000, or $5,000 if you are 50 or older.”

For the 2008 tax year, the maximum contribution is $5,000, or $6, 000 if age 50 or older. If one spouse has earnings but the other spouse doesn’t, a separate spousal IRA can be opened for that spouse with the same maximum contribution.

Swanson explains there are two types of IRAs – a traditional IRA and a Roth IRA. With a traditional IRA your earnings grow tax deferred. When you withdraw your money in retirement, you pay tax on the withdrawals. You must begin withdrawing from your traditional IRA by age 70 1/2.

According to Swanson, for some individuals their IRA contributions may even be deductible. “If you are not covered by a pension plan or you meet an income test, you can deduct your annual contribution from your taxable income for the year. For example, for the 2007 tax year if you are covered by an employer pension plan, you can still contribute to a deductible IRA if your adjusted gross income is $52,000 or less if single or $83,000 or less if married, filing jointly.”

Low- and middle-income taxpayers may also receive a tax credit up to $1,000 per individual for contributions to an IRA or other qualified retirement plan such as a 401(k), Swanson adds.
Another type of IRA is the Roth IRA. Like a traditional IRA, a Roth must be funded from earned income and there are the same contribution limits and deadlines. “Roth contributions are always made with after-tax money however,” Swanson says. “All earnings within a Roth are tax-free if withdrawn after age 59 1/2 --not tax-deferred as in a traditional IRA. Because you have already paid tax on your contributions, you can withdraw your contributions--but not your account earnings--at any time without incurring a penalty or tax.”

Other advantages of the Roth include the ability to contribute to your account after age 70 1/2 and no requirement that you begin withdrawing money at any age. Also, if you die with a balance in your Roth IRA, it goes to your heirs tax-free, unlike the traditional IRA where the heirs owe tax.

Not everyone can contribute to a Roth however. “For the 2007 tax year a Roth IRA contribution is not allowed for example if you are married filing jointly and have income of $166,000 or more,” Swanson says.

Whether it is better to invest in a traditional IRA or a Roth IRA will depend on several factors, Swanson adds. A Roth is typically a better choice for individuals who can’t deduct their contributions to a traditional IRA. “However, before contributing to any IRA it is better to increase your contributions to your 401(k) or other salary reduction plan if your contribution will be matched by your employer.”

You can set up an IRA through a bank, credit union, savings and loan association, insurance company, mutual fund company or investment broker. “When deciding how to invest your IRA contributions it is important, as always, to consider risk and fees,” Swanson concludes.

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The ISU Extension Invest Wisely Project provides a series of newspaper, radio, and web resources for investors.  It is funded by a grant from the Investor Protection Trust (IPT).  The IPT is a nonprofit organization devoted to investor education.  Since 1993 the IPT has worked with the States to provide the independent, objective investor education needed by all Americans to make informed investment decisions.  www.investorprotection.org.