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"Tax Guidance Continued :: Make the Most of Your IRA"
Make the Most of Your IRA
Investors have two options for their individual retirement accounts (IRAs). The first option is a traditional IRA, the second option is a Roth IRA (named for the account's congressional sponsor), which features -- among other benefits the ability to accumulate tax-free earnings under certain circumstances. In this report we'll discuss the features of the traditional IRA. You may want to review material outlining the Roth IRA -- or talk to your financial planner -- before you make a decision as to which IRA is right for you.
What Is a Traditional IRA?
An individual retirement account allows your investment earnings to grow tax deferred until withdrawn, typically at retirement. Generally, if you have earned income or receive alimony, you can establish as many IRA accounts as you want prior to the tax year in which you reach age 70 1/2. You may also have an IRA even if you participate in a qualified pension, profit-sharing, or other retirement plan. Your entire contribution may not be deductible on your income tax return, depending on your income. IRAs offer two distinct advantages in terms of taxes: potential deductibility of contributions and tax deferral on investment earnings.
Rules on Contribution Limits
Currently, the annual contribution limit is $4,000 (in general, married couples filing jointly can contribute a total of $8,000, even if only one spouse has income). In 2008, it will increase to $5,000 per taxpayer. Thereafter, the contribution limit will be adjusted for inflation. Individuals aged 50 and older are now able to take advantage of new "catch-up" contributions to IRAs. The allowable catch-up contribution is $1,000 per year beginning in 2006. In addition, you can open an IRA or make contributions to an existing IRA as late as the deadline for filing a tax return for that year. That means you would have until April 2007, to make your 2006 IRA contribution.
Keep Your Retirement Money
IRAs can also come in handy when you're about to leave jobs and need to move your 401(k) money. If your former employer requires that you withdraw your retirement money, you can move your distribution safely from your former employer's qualified retirement plan into a rollover IRA and avoid owing current income tax on the distribution. If you choose to physically receive part or all of your money and do not replace the entire amount within 60 days, you will be subject to penalty fees and taxes on the amount kept. Clearly, you can avoid many headaches and keep your retirement nest egg intact by making sure your hands never touch your retirement money until age 59 1/2.
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