Planning Ahead for Retirement

IRA Payments as Tax Deductions
You may also be able to take a tax deduction on your IRA payments. To be eligible, you must meet one of two criteria:

1. You cannot be covered by an employer-sponsored pension plan. If you are married and filing a joint return, your spouse cannot be covered.
2. Your adjusted gross income must be less than $33,000 if you are single, or, if you are married, your combined adjusted gross income must be less than $53,000.

Under certain combinations of these conditions you might be entitled to a prorated partial deduction. If you hire someone to prepare your taxes, check with that person on the current tax regulations.

The money in your IRA account is tax-deferred whether or not you can get a tax deduction on your contributions.

IRA Limits
The maximum annual IRA contribution limits from 2002 to 2004 are $3000, $4000 from 2005 to 2007, and $5000 thereafter. In addition to these contribution limits, workers 50 years of age or older will be able to contribute $500 above those limits from 2002 to 2005 and $1000 thereafter.

Traditional IRAs and Roth IRAs
The two kinds of IRAs are Traditional IRAs and Roth IRAs. Roth IRAs and Traditional IRAs are similar in some ways and different in other ways.

Traditional IRAs are tax deductible if you meet certain criteria and Roth IRAs are not (See Table 4). Taxes are due when you withdraw from a Traditional IRA. There are income limits for each type but they differ. There is a 10% early withdrawal penalty if withdrawal occurs before you are 59 1/2 years for both types. In addition, the Roth IRA must have been held for five years.

For a Traditional IRA you must withdraw a minimum amount at age 70 1/2. For a Roth IRA, there are no requirements for when distributions must begin.

Investing IRA Capital
IRAs are self-directed accounts, which means you are free to make whatever investment decisions you want with the capital held in your IRA. The key to making your IRA profitable is diversification. Divide the IRA capital among various investments that have a history of performing well. A transfer rather than withdrawal of your IRA funds from one type of account to another (called a rollover) may or may not be tax free. Your financial institution may also charge you a fee for the rollover.

Planning Ahead for Retirement

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