Retirement Planning Programs

An IRA is a personal tax-deferred savings plan that can be set up at a variety of financial institutions. The maximum annual contribution is $3,000 in 2002–2004, $4,000 in 2005–2007, and $5,000 in 2008 and later, and earned income from a job or self-employment is required. IRAs are not an investment, per se, but, rather, an account for which a variety of investment products (e.g., stock, CDs, mutual funds) can be selected.

Traditional deductible IRAs offer a double tax benefit: tax-deferred growth and a federal tax deduction for the contribution amount. Income limits ($44,000 of adjusted gross income for singles and $64,000 for joint filers in 2002) and availability of a qualified employer plan determine eligibility for a tax deduction.

Roth IRAs provide no up-front tax deduction. However, earnings grow tax-deferred and withdrawals are tax-free if made more than five years after a Roth IRA is established and after age 59 1/2. Unlike traditional IRAs, Roth IRAs don’t require minimum distributions after age 70 1/2, and contributions can continue after this age if a person has earned income. Roth IRAs are available to single taxpayers with up to $110,000 of adjusted gross income ($160,000 for married couples).

Traditional nondeductible IRAs offer neither an up-front tax deduction nor tax-free earnings. Still, they provide tax-deferred growth and are generally better than taxable accounts for taxpayers that don’t qualify for other IRA options.

Starting in 2002, persons aged 50 and older may make additional ‘‘catch-up’’ contributions to either a traditional or Roth IRA. An additional $500 can be saved in 2002–2005 and an extra $1,000 in 2006 and later.

To determine which IRA is best, based on personal factors such as age and household income, individuals can check one of the IRA calculator links on the website www.rothira.com. It should be noted that withdrawals before age 59 1/2 from IRAs, salary reduction plans, and plans for the self-employed are considered premature distributions. A 10 percent penalty will be levied, except in specific instances like disability, in addition to ordinary income tax at an investor’s marginal tax rate (e.g., 28 percent).