IRA Options

Edition: February 2001 - Vol 9 Number 02
Article#: 891
Author: Richard Yercheck

Today, many Americans are finding that saving for retirement must include several investment sources to ensure sufficient dollars for their retirement years. For most, planning for a comfortable and financially secure retirement begins with a sound financial plan that includes an Individual Retirement Account. Investors have more options today than ever before when it comes to choosing the best way to save and invest for retirement. Due to recent tax legislation, you may now choose from an array of IRAs that provide flexibility when planning your retirement. Over the past year, you have probably become familiar with names such as Traditional, Roth, and Education. These are just a few of the many new options available to individual investors.

Traditional IRAs — Preserving Your Retirement Investment

Traditional IRAs continue to be a popular option for individual retirement plans. If you receive earned income and are under age 70, you may make annual contributions to an IRA up to $2,000 and deduct it from your income for federal tax purposes if you meet certain qualifications. The Taxpayer Relief Act of ’97 made several changes which may increase the ability to deduct IRA contributions. First, if an individual is not covered by an employer-sponsored retirement plan they may deduct the entire contribution. In addition, a spouse’s participation in a retirement plan will not affect the other’s ability to deduct. If he or she is covered by a plan, they may still deduct the contributions if their Adjusted Gross Income (AGI) is under certain thresholds. The Taxpayer Relief Act of ’97 increases those thresholds incrementally through the year 2007 (see chart).

If your income exceeds these levels, you can still make a $2,000 annual contribution, but it will not be deductible. You should consult your tax advisors about the deductibility of an IRA contribution as it relates to their personal circumstances.

There are certain penalty-free provisions for withdrawal from an IRA prior to age 59 such as first home purchase, higher education expenses, disability, excess medical expenses, substantial equal periodic payments, or death.

Roth IRAs — A Tax-Advantaged Way to Save

Consider the Roth IRA if you are the type of individual that would prefer to pay taxes now to avoid paying taxes on your retirement plan’s growth later. Your Roth IRA contributions can grow free from taxes as compared to a Traditional IRA where your earnings are simply tax-deferred. This means more money for your retirement–a feature unique to the Roth IRA.

You are eligible to establish a Roth IRA as long as you or your spouse received earned income under certain levels during the year. If you are a qualified individual, you may contribute up to $2,000. These contributions are never deductible as they may be if made to a Traditional IRA. Unlike a Traditional IRA, contributions to a Roth IRA are permitted after age 70. You are not required to begin distributions at age 70 as is the case with a Traditional IRA.

Education IRAs — Investing in Your Children’s Future

The Education IRA is a convenient way to save for a child’s higher education. Not only do the earnings on the contributions accumulate tax-deferred, but qualified withdrawals to pay for higher education expenses are tax-free. The designated beneficiary may be anyone under the age of 18-years-old, and may receive up to $500 per year in contributions into an Education IRA.

An eligible Depositor need not be related to the child for whom the contribution is being made; however, a parent or guardian must be named as a Responsible Individual for the Education IRA. This allows for the parent or guardian to oversee contributions and to ensure that the annual contribution does not exceed $500 in the case of multiple Depositors.

Understanding Your Goals — and Risks

Reviewing these options, may help to narrow your focus. Before making any decision, it is vital to first determine how much risk you can tolerate and how long your retirement nest egg can accumulate. In addition, it is important to consider retirement plans available through your employer, such as a 401(k) plan in which you can defer pre-tax dollars from your payroll directly into the plan. While these IRAs discussed here are a few of your basic options, there are other very specialized choices available. Your financial advisor and tax professional should be consulted to help determine which IRA option is appropriate for you.

2006stays at $50,000$75,000-85,000
2007stays at $50,000$80,000-100,000

The chart above illustrates Taxpayer Relief Act of ’97 increases. Note: Partial deductions will apply if MAGI falls between the dollar levels in each category.

About the Author:

Richard Yercheck is a Financial Consultant with IJL Wachovia in Charlotte, NC. He can be reached for comment at 800-929-0724 ext. 9514. IJL Wachovia is one of the nation’s largest full-service, regional, brokerage firms, offering a full rage of investment services to investors.