IRA Individual Retirement Accounts
- By:
- Catherine Brock | September 23, 2007
Individual Retirement Accounts (IRAs) provide tax benefits for responsible savers.
Hoping to win the lottery or a bingo jackpot isn't a retirement planning strategy. There's just no getting around the fact that saving early and often is the best way to set yourself up for the golden years. Start now, and use an Individual Retirement Account (IRA) to stretch your savings as far as they'll go.
IRAs are tax-advantaged savings accounts. The idea is to put money into the account regularly, build a diversified investment portfolio, and watch your balance grow. IRAs come in four main flavors:
• Traditional IRA: an individual account offering tax-deferred contributions and earnings
• Roth IRA: an individual account offering tax-free earnings
• SIMPLE IRA: a tax-deferred account offered by small businesses with less than 100 employees
• SEP IRA: a tax-deferred account designed for small business owners
Before you embark on an IRA savings program, you should understand the basic tax advantages and contribution limits associated with each account type.
Traditional IRAs offer tax-deferred contributions and earnings. Any contribution up to the allowed limit will reduce your taxable income in the year of the contribution. Then, your investments might double or triple within the account, and you don't pay tax on any of it until you start withdrawing the money. However, if you make a withdrawal before you turn 59½, the IRS will slap you with a penalty.
Roth IRAs don't give you any tax breaks for making contributions. But once you've had the account open for five years and you reach 59½, you can withdraw the money tax-free, earnings and all.
SIMPLE and SEP IRAs offer tax-deferred contributions, like a traditional IRA, albeit with higher contribution limits.
IRA contribution limits are set for each tax year. In 2007, the contribution limit for traditional and Roth IRAs is $4,000; in 2008, it will go up to $5,000. If you're over 50, you can contribute up to $5,000 in 2007 and $6,000 in 2008 as "catch-up" contributions.
The 2007 contribution limit for a SEP IRA is 25 percent of wages, up to a maximum of $45,000. For a SIMPLE IRA, you can contribute $10,500 of your salary and receive a maximum employer contribution of 3 percent. If you're over 50, the SIMPLE IRA allows for an additional $2,500 catch-up contribution.
When deciding which account is right for you, it's likely you'll be choosing between the traditional and Roth IRAs. Both have advantages. The traditional IRA allows you to stretch your dollar now, while a Roth frees you from tax liability later when your income is limited. If you're not sure which suits you better, have a chat with your tax advisor.
Whatever you decide, start saving cash soon. No one retires on non-winning lottery tickets and incomplete bingo cards.
Hoping to win the lottery or a bingo jackpot isn't a retirement planning strategy. There's just no getting around the fact that saving early and often is the best way to set yourself up for the golden years. Start now, and use an Individual Retirement Account (IRA) to stretch your savings as far as they'll go.
The basics
IRAs are tax-advantaged savings accounts. The idea is to put money into the account regularly, build a diversified investment portfolio, and watch your balance grow. IRAs come in four main flavors:
• Traditional IRA: an individual account offering tax-deferred contributions and earnings
• Roth IRA: an individual account offering tax-free earnings
• SIMPLE IRA: a tax-deferred account offered by small businesses with less than 100 employees
• SEP IRA: a tax-deferred account designed for small business owners
Before you embark on an IRA savings program, you should understand the basic tax advantages and contribution limits associated with each account type.
Tax advantages
Traditional IRAs offer tax-deferred contributions and earnings. Any contribution up to the allowed limit will reduce your taxable income in the year of the contribution. Then, your investments might double or triple within the account, and you don't pay tax on any of it until you start withdrawing the money. However, if you make a withdrawal before you turn 59½, the IRS will slap you with a penalty.
Roth IRAs don't give you any tax breaks for making contributions. But once you've had the account open for five years and you reach 59½, you can withdraw the money tax-free, earnings and all.
SIMPLE and SEP IRAs offer tax-deferred contributions, like a traditional IRA, albeit with higher contribution limits.
Contribution limits
IRA contribution limits are set for each tax year. In 2007, the contribution limit for traditional and Roth IRAs is $4,000; in 2008, it will go up to $5,000. If you're over 50, you can contribute up to $5,000 in 2007 and $6,000 in 2008 as "catch-up" contributions.
The 2007 contribution limit for a SEP IRA is 25 percent of wages, up to a maximum of $45,000. For a SIMPLE IRA, you can contribute $10,500 of your salary and receive a maximum employer contribution of 3 percent. If you're over 50, the SIMPLE IRA allows for an additional $2,500 catch-up contribution.
Paying taxes now or later
When deciding which account is right for you, it's likely you'll be choosing between the traditional and Roth IRAs. Both have advantages. The traditional IRA allows you to stretch your dollar now, while a Roth frees you from tax liability later when your income is limited. If you're not sure which suits you better, have a chat with your tax advisor.
Whatever you decide, start saving cash soon. No one retires on non-winning lottery tickets and incomplete bingo cards.
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