To supplement your employers
plan you may want to open an Individual
Retirement Account (IRA) account.
An IRA is a very good addition to your company's plan. But, before you
jump in, you have some choices to make, starting with which type of IRA
best suits your needs.
Traditional IRA
A traditional IRA is a personal, tax-deferred
retirement account. You can put up to $4,000* each year - but no more
than you total earnings if you earn less than $4,000* - in your choice
of investments, and you can defer income taxes on your earnings. That
means you won't owe taxes on earnings in the account until you start to
withdraw money.
All traditional IRAs have three
things in common:
Earnings are tax-deferred
Taxes are paid on the earnings when you withdrawal
You are required to withdraw beginning at age 70 1/2
Your contributions to a
traditional IRA may be deductible or nondeductible. Whether you qualify
to deduct your contribution depends on your adjusted gross income (AGI),
which is your total income minus certain deductions, and on whether you
are eligible for an employer's plan.
Keep in mind, though, that if your employer doesn't offer a retirement
plan, you can always deduct the entire amount of your contribution up to
$4,000* for a single year, no matter what your AGI is.
Roth IRA
Like traditional IRAs the
earnings in Roth IRAs accumulate tax deferred. And earnings are totally
tax-free if you follow the rules for withdrawal. That means your account
must have been open at least five years and you must be at least 59 1/2
when you withdraw.
The most you can contribute in one year is $4,000* - or the total amount
you earned if it's less than $4,000*. But there are income limits on
eligibility. Basically, you qualify if you're single and make less than
$95,000, or if you're married, file a joint tax return, and your
combined income is less than $150,000. You can make partial Roth
contributions for incomes up to $110,000 if you're single, and up to
$160,000 if you're married and file jointly.
Spousal
IRA's
If you're not earning
income but your spouse is, a spousal IRA can be opened in the name of
the non-working spouse and up to $4,000* can be contributed in to the
spousal IRA. The non-working spouse's ability to deduct a full IRA
contribution is not affected by the working spouse's participation in an
employer plan regardless of their income level. If a spousal IRA is
used, you must file a joint tax return any year either of you put money
in a spousal account.
Your family income will determine if you can select a Roth IRA. And your
income - or whether the working spouse's employer offers a retirement
plan - determines whether you can deduct the contribution to a
traditional IRA on your tax return.
The great appeal of a spousal IRA is that the non-working spouse is able
to plan for their retirement.
The
Investments
Your have a great deal of flexibility when you
choose your IRA investments. You can put your money into low-risk
investments, such as a savings account, a certificate of deposit (CD),
or a US Treasury bill. However, you also have the choice to invest in
securities such as mutual funds, stocks and bonds.
The only things you can't buy for an IRA are gems, non-US coins, fine
art, or other collectibles.
You have the power to choose which types of investments to include in
your plan. That means you're also responsible for the following the
rules of the IRA account, such as only contributing the amount you're
entitled to each year, and making investments that have been approved.
And you must remember to report contributions to the IRS.
*Individuals aged 50 and over may contribute an
additional $1,000 as a catch-up contribution. Congress added this catch-up
contribution to allow older workers to save more for their retirement.
