Hooray for the IRA! - part 1

Hooray for the IRA!

<h1>A five-part primer about Individual Retirement Accounts—and how they can help grow money for retirement</h1>

There’s a very good chance you could spend 20 or more years as a retiree. All the more reason you should try to contribute as much as you can to your workplace retirement plan. But don’t stop there, because another strategy can help you save even more. You can invest outside your retirement plan and still obtain key tax advantages from an individual retirement account, or IRA.

There are two basic types of IRAs—traditional and Roth—and each offers specific advantages. So before you invest, you’ll need to consider your situation carefully. For example, will tax deductibility help you most now, or would a tax break later be more advantageous? Your choice also will be determined by your current income level, and how soon you’ll need the money.

This series of articles will explain these issues and describe the advantages of traditional and Roth IRAs. The next section will feature traditional IRAs—the original individual retirement account.

<h1>Traditional IRAs: the original individual retirement accounts</h1>

Congress created the traditional IRA in 1974 to encourage Americans to save more for retirement by allowing a tax deduction for contributions and deferral of income taxes on earnings.

You might be able to deduct all of your IRA contributions if you aren’t covered by a workplace retirement plan. Even if you are a retirement plan participant, you could be able to deduct all or some of your contributions for the tax year if your earnings don’t exceed federal limits.

As with your workplace retirement plan, an IRA’s earnings aren’t taxed until you or your beneficiary withdraw money from your account. This reduces current taxes and could boost account earnings since money that would otherwise have gone toward income taxes remains in your account.

Keep in mind that income taxes are due on withdrawal. And because IRAs are long-term retirement investments a 10% federal tax penalty might apply to withdrawals made before you turn 59 ½.

Traditional IRA Q&As

Q. Who is eligible to invest in a traditional IRA?

A.  You should be eligible as long as you have earned income and are under the age of 70½. You can also contribute to a traditional IRA for a non-earning spouse.

 

Q.  How much can you contribute each year?

A.  You can contribute up to $5,000 to an IRA in the 2009 tax year. Also, if you are age 50 or older, you can make “catch-up” contributions of up to $1,000 in 2009.

      You can make IRA contributions in a single lump sum; incrementally, as you see fit over the contribution period; or automatically, by payroll reduction or electronic fund transfer from your bank account. And with IRAs, you actually have nearly 16 months to make the maximum annual contribution! That’s because contributions made before April 15 of any year can, on your instructions, be assigned to the prior calendar tax year.

 

Q.  How are IRA contributions invested?

A.  Generally, you can invest your IRA money in various investments including variable annuity investment options, mutual funds and fixed-account options. Whatever your choice, remember that the value of variable options and mutual funds will fluctuate so that your investment, when redeemed, could be worth more or less than the original value.

 

Q.  How long can you leave money in a traditional IRA?

A.  You must begin withdrawing money at age 70 ½. Your financial advisor can help you calculate the amount of this “required minimum distribution” under federal tax law.

 

The next section will discuss the features and advantages of Roth IRAs.

 

Roth IRAs—An IRA alternative

The Roth IRA was created in 1997 by Congress and named after Sen. William V. Roth, Jr. It differs from the traditional IRA in one key aspect: Though contributions to a Roth IRA are never deductible, qualifying withdrawals of earnings are generally tax-free if you’ve had the Roth IRA account for at least five years and one of these conditions has been met:

• You’re 59 ½ or older
• You become disabled
• You’re making a first-time home purchase
• Your death

Is a Roth IRA right for you? To help you decide, we offer some frequently asked Roth IRA questions and answers.

 

Q.  Who is eligible for a Roth IRA?

A.  You could be eligible to make a full contribution if you have earned income of less than $166,000 or a partial contribution if you have earned income between $166,000 and $176,000 (married and filing jointly) or for single filers, a full contribution if you earn less than $105,000 and partial between $105,000 and $119,000. You also could be eligible to contribute to a Roth IRA on behalf of a non- or low-earning spouse.

 

Q.  Why invest in a Roth IRA?

A.  The Roth IRA’s unique feature is the possibility of tax-free withdrawal of earnings. Generally, the rule of thumb is this: If you are not eligible to take the deduction for a contribution to a traditional IRA and/or you anticipate that your federal marginal income tax rate will be higher during retirement than during your working years, you might wish to consider a Roth IRA.

 

Q.  How much can you contribute each year?

A.  You can contribute up to $5,000 in 2009. Also, if you are age 50 or older, you can make a “catch-up” contribution of up to $1,000 in 2009. Unlike a traditional IRA, you can continue to contribute to a Roth IRA even after age 70 ½, provided you still have earned income.

 

Q.  Can you deduct Roth IRA contributions?

A.  No. Contributions to Roth IRAs are never tax deductible.

 

<h1>Q.    How long can you leave money in a Roth IRA?</h1>

A.  As long as you like. Unlike traditional IRAs, Roth IRAs have no federal government requirement to begin withdrawing money while you are alive. However, if you withdraw money before age 59 ½, and the withdrawal doesn’t meet the qualifications described above, you might have to pay a 10% federal early withdrawal tax penalty on the earnings (but not on your contributions).

 

In next article, we'll discuss IRAs for non-wage-earning spouses.

 

If you’d like more information about IRAs and other retirement investment choices, contact Andrew Brake at 336-833-3066 or Andrew.brake@valic.com

 

 

Securities and investment advisory services are offered by VALIC Financial Advisors, Inc., member FINRA and an SEC-registered investment advisor.

VALIC represents The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.

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