Tuesday, March 08, 2005

IRAs: Part 1

Defining the Beast Itself

The individual retirement account is a personal, tax-deferred account for people who are employed, and their spouses. You can set up an IRA at almost any bank, brokerage, insurance company, or mutual fund. There are a wide variety of investment options to choose from, and your earnings are untaxed until they are paid out of the account.

Tax law lets you contribute up to $4,000 to your IRA for 2005-2007; $8,000 for married people who file a joint tax return. If you're not covered by a qualified retirement plan at work (or if covered, you fall below a certain income level) your IRA contribution may be fully or partially tax-deductible. As with other tax-deferred plans, there are caveats. Any money you withdraw is taxed at your ordinary income tax rate. Plus, if you receive any withdrawals before you reach age 59 1/2, there may be a 10 percent penalty tax. Traditional IRAs require you to begin taking your money out once you attain age 70 1/2.

The Roth IRA is a variation that lets you withdraw principal and earnings completely tax-free after age 59 1/2, as long as the contributions have been in the plan at least five years. Unlike traditional IRAs, Roth IRAs don't require you to take distributions at age 70 1/2, and you can keep contributing to them as long as you like as long as you have earned income.

source: NYL

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