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Investing for Retirement with IRAs

Radio Transcript, 2 minutes 40 seconds, for use during week of Feb. 11.

Description:  Penny and Susan discuss traditional and Roth Investment Retirement Accounts.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection trust, providing investor education on the web at: investorprotection.org.

Susan: Penny, we’ve talked about some ways to save for retirement and this week I have some questions for you about Individual Retirement Accounts.  Just what  are they and why should I invest in one?

Penny: Individual Retirement Accounts, or IRAs as they’re usually called are a good and easy way to save for retirement.  And an IRA is a good way to save for retirement in addition to your 401(k) plan you have through your job.

Susan: What do I need to know about IRAs before I decide to invest?

Penny: There are two types of IRAs.  The first is a traditional IRA, which allows your earnings to grow tax deferred. 

Susan:  Then would I pay taxes on the money when I withdraw it?

Penny: Yes.  And you must begin withdrawing from a traditional IRA by age 70 and a half.

Susan: Can I deduct the contributions I make on my tax return?

Penny: Yes, if you’re not covered by a pension plan or you meet an income test, you can deduct your contributions. 

Susan: What’s the other type of IRA?

Penny: The second type is called a Roth IRA—it’s named after a Congressman--and with these IRAs contributions are always made with after-tax money.  However, withdrawals from a Roth IRA are tax-free if you withdraw them after you turn 59 and a half.  Also, because you’ve already paid tax on your contributions, you can withdraw your contributions--but not your account earnings--at any time without a penalty or tax.

Susan: So . . . do you have to start withdrawing from a Roth IRA like you do with the traditional one?

Penny: There is no requirement that says you have to make withdrawals when you reach a certain age and you can contribute to a Roth IRA after age 70 and a half.  However, not everyone can contribute to a Roth IRA--for the 2007 tax year, for example, you couldn’t contribute if you were married filing jointly and had an income of 166,000 dollars or more.

Susan: Thank you, Penny.  This has been very helpful.
Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

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Updated February 11, 2008