Individual retirement accounts are popular supplements to employer retirement plans. Traditional IRAs allow contributions to be deducted from taxable income when they are made, but withdrawals at retirement are taxed. The Roth IRA is an alternative, with taxes paid on contributions when they are made. However, both contributions and earnings are tax free when they are withdrawn after age 59 1/2. You can start a Roth with an initial deposit or by converting a traditional IRA.
Determine your eligibility based on your taxable income. At the time of publication, the limit was $5,000 a year for an individual, or $6,000 if over age 50. That limit applied if your adjusted gross income was up to $173,000 for married couples filing joint tax returns. You were allowed a reduced amount with income up to $183,000. No contributions are allowed above that income level. Limits for single filers, heads of households or married filing individually were $110,000 and $125,000 at the time of publication.
Couples Get Double
Married couples filing joint tax returns are allowed twice the maximum individual contributions, even if only one spouse has income. A husband can contribute to his IRA and claim deductions for both himself and his wife, for instance. The only restriction is that the contributions can't be more than the combined compensation reported on the income tax return. Participation in an employer-sponsored retirement program does not affect contributions.
There are no limits on Roth contributions if they are rollovers from a traditional IRA or another retirement fund like a 401(k), often a good way to start a Roth IRA. Rollovers from tax-deductible funds like a traditional IRA may be subject to income tax, however, when they are converted to an after-tax Roth IRA. Rollovers from funds built with taxed contributions are exempt.
Select an IRA provider, a bank or similar financial institution, a mutual fund, brokerage house or insurance company for your IRA accfount. Ask about investment options and fees. Some providers charge startup fees or annual maintenance fees, others waive most fees. Start with an initial investment that is the most you can afford. There is no legal minimum, but some account providers have minimum starting amounts, often up to $2,500.
Set Investment Goals
Arrange your investments according to your retirement goals. Investment options vary with providers, but generally you can choose from among several types -- stocks, bonds, CDs or even regular savings accounts. Financial institutions may offer fewer options than brokerage firms, but in general you want to put funds into higher-earning but riskier investments in your early years and into secured or guaranteed investments as you near retirement. Some investments are federally insured.
Keep your account papers in a safe but handy place and check on your investments regularly. Your provider will send an annual statement. Most providers allow some switching of investments -- to substitute mutual funds for stocks, for example, although they may charge fees to do this. Name a beneficiary when you fill out the paperwork to start your Roth IRA, generally a spouse.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.