Individual Retirement Accounts (IRAs)
Individual Retirement Accounts (IRAs) are
tax-favored savings plans that allow you to
invest a maximum amount each year for retirement.
They are not investments in their own right,
but rather they “house” investments. An IRA
can be opened using various investments, such as:
- Mutual funds.
- Individual securities with a brokerage firm.
- Certificates of deposit at banks.
- An annuity with a life insurance company.
You can contribute a maximum of $4,000
in 2007 and $5,000 in 2008. Taxpayers who
are age 50 or older by December 31 can make
an additional $1,000 contribution to their IRAs.
Whether earnings are taxed for federal income
tax purposes upon withdrawal depends on the
type of IRA, traditional or Roth.
A financial planning professional can
help determine which IRA is best for you.
Traditional IRA
With a traditional IRA, you may be able
to deduct your contribution from your
taxable income, thus reducing current
federal income taxes. This depends on
your income and if you are covered by
a retirement plan at work. While your
money grows, taxes are deferred.
You will pay ordinary federal income
taxes when you withdraw the money at
retirement. Even if you cannot deduct
an IRA contribution from your taxable
income, you may still make the contribution
if you have earned income. Make sure
to file IRS Form 8606 with your federal
income tax return each year to report
nondeductible contributions.
You may begin withdrawals from a
traditional IRA at age 59½ without
a 10 percent penalty; you must begin
withdrawals by April 1, following the
year you reach age 70½. If you
withdraw before age 59½, you generally
will be subject to an additional 10
percent penalty.
Withdrawals can be made without
penalty for certain situations, including
qualified first-time homebuyer expenses,
qualified education expenses, unreimbursed
medical expenses, medical insurance if the
IRA account owner is unemployed, and death
or disability as defined by the Internal
Revenue Code.
Roth IRA
Features of a Roth IRA include:
- Qualified withdrawals of earnings from a
Roth IRA are federal income tax-free.
- There is no mandatory requirement to withdraw money during the Roth account owner’s lifetime.
- You cannot deduct your contribution to a Roth IRA from your income for federal income tax purposes.
Investing in a Roth IRA should be considered
long term. You can withdraw contributions at any
time from a Roth IRA without penalty or federal
income tax. However, if you withdraw earnings before
the account has been open at least 5 years or
before age 59½, you are generally subject to
federal income taxes and a 10 percent penalty
on the amount of earnings withdrawn. There are
exceptions to this penalty for certain situations,
including qualified first-time homebuyer
expenses or in the event of the Roth IRA owner’s
death or disability as defined by the Internal
Revenue Code. Special rules apply for withdrawals
of money in a Roth IRA that were converted
from a traditional IRA.
To access the IRS Publication 590,
Individual Retirement Arrangements,
visit www.irs.gov.
In “Search” type in the keyword “590.”
Annuities
An annuity is a contract between you and an
insurance company that offers a guaranteed
income stream for life or a specific duration,
with payments starting right away
(immediate annuity) or in the future
(deferred annuity). In some cases,
you may surrender the contract and
receive a lump sum. The USAA Educational
Foundation publication, Annuities, provides
more information.
Other Tax-Advantaged Retirement Accounts
Other types of Tax-Advantaged Retirement
Accounts are described in the chart below.
| Other
Tax-Advantaged Retirement Accounts |
| Plan Type |
Plan Description |
Tax Deductible |
Withdrawal Age |
| Simplified Employee Pension (SEP) |
A tax-deferred employer-sponsored
retirement plan for self-employed individuals
and small businesses. |
To the employer |
Generally age 59½ |
| 401(k) Plans |
An employer-sponsored retirement
savings plan funded by
employee and sometimes employer
matching contributions. |
Yes |
Generally age 59½ |
| 403(b) Plans |
An employer-sponsored retirement
savings plan funded by
employee and sometimes employer
matching contributions
of public schools, hospitals, and
certain non-profit organizations. |
Yes |
Generally age 59½ |
| Savings Incentive Match Plan
for Employees (SIMPLE) |
An employer-sponsored retirement
savings plan funded by employer
and employee contributions for businesses
with up to 100 employees. |
Yes |
Generally age 59½ |
Your Pension Plan
To learn about the details of a corporate
pension plan, ask for a “Summary Plan Description”
from your employer and consider the answers to
the questions on Sizing Up Your Pension Plan.
|
Basic Money Management
Basic Money Management
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