Consider Opening an IRA To Add to Your Savings

By Karen E. Klein

March 22, 2003

If you've maxed out your company retirement plan, or don't have access to one, an IRA (Individual Retirement Account) is a great supplement to your retirement savings. It's similar to a company-sponsored pension because it gives you tax breaks to encourage you to set aside money for retirement.

Depending on your family's adjusted gross income, and your participation (or nonparticipation) in a company- sponsored plan, you may be able to add a tax-deductible contribution to a traditional IRA in 2003 - and you even get up until April 15, 2004, to decide. Even if your contribution is not tax-deductible, you can fund an account and your earnings and gains will grow tax-deferred (or tax-free, if you choose a Roth IRA), adding a nice boost to your retirement savings.

As with company pensions, there are several accounts commonly referred to as IRAs, and the tax advantages vary. The two most common are the traditional IRA and the Roth IRA. Ellen G. Gordon, a CPA at Margolin Winer & Evens LLP in Garden City, answered some basic questions on the two:

Am I eligible for a traditional IRA? Sure - if you (and your spouse, if you file taxes jointly) received taxable compensation and will not reach age 70 1/2 by the end of the year. "Compensation includes wages, commissions, self-employment income and any taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance," Gordon says, but "does not include income from investments such as rental income, interest income and dividend income, pensions or annuities, Social Security benefits, deferred compensation, income from a partnership in which you're a passive investor and amounts excluded from income, such as foreign-earned income."

What is a Roth IRA? It's a nondeductible IRA that you can set up - regardless of age or whether you're in a company- sponsored pension plan - as long as your adjusted gross income ("AGI" - generally the figure listed on the last line of the first page of your 1040 form) isn't too high. If you're married and file jointly, you can make a full Roth contribution if your AGI is less than $150,000 and a partial contribution if your AGI is $150,000 to $160,000. You're ineligible if your AGI is over $160,000. If you're a single head of household, you're eligible if your AGI is less than $95,000 and partially eligible from $95,000 to $110,000. If you're a married couple filing separately, you're eligible if your AGI is $0 to $10,000.

Where do I get an IRA? Most banks and other financial institutions offer IRAs. "Your tax planner, accountant, stockbroker, certified financial planner or banker should be able to help you set up an IRA, provide you with some guidance on which type to choose and give you investment suggestions," Gordon says.

How much can I put in? In 2003 and 2004, you can contribute $3,000. If you're 50 or older, notch that up to $3,500. The limits will go up to $4,000 in 2005 and $5,000 in 2008, Gordon says, and they apply to both Roth and traditional IRAs. Contributions have to be made by cash, check or money order.

What about taking money out? With a traditional IRA, you must take minimum distributions from your account when you reach 70½ (although your first distribution can be delayed until April 1 the following year) and the money will be taxed as income. If you take a distribution before age 59½, it's subject to a 10 percent early withdrawal penalty.

With a Roth IRA, you can withdraw your principal any time without penalties or taxes, but you're not forced to take distributions during your lifetime. If certain requirements are satisfied, your "qualified" distributions will be tax-free. Withdrawals are considered "qualified" if you take them at or after age 59½, as a result of death or disability, for a first-time home purchase and if the funds have been in the account for at least five years. If your distribution doesn't meet those guidelines, the principal will still be tax- free but the earnings will be taxable and may be subject to a 10 percent early withdrawal penalty.

Will my IRA contribution be tax-deductible this year? If you've got a Roth IRA, no. If you're talking about a traditional IRA, maybe. The answer depends on whether you're actively participating in an employer-sponsored pension plan and how much you're earning.

For a single person participating in a company pension, Gordon says, an IRA contribution will "phase-out" if your AGI is $34,000 to $44,000. If you and your spouse file jointly and are in company plans, your IRA contributions will phase out when your AGI is $54,000 to $64,000. If only one spouse is in an employer plan, the other spouse (working or not) can deduct an IRA contribution if your AGI is $150,000 or less, Gordon says. The deduction for the nonactive participant spouse phases out when AGI is $150,000 to $160,000. The range is $0 to $10,000 for married individuals who file taxes separately.

Can my nonworking spouse have an IRA? You can set up a "spousal IRA" from your income. The contribution limits apply to spousal IRAs, with the $3,500 catchup contribution available if your spouse is 50 or older.

Should I choose a traditional or a Roth IRA? Should I convert my traditional IRA to a Roth? These are the tricky questions. We'll ask Gordon to answer them next week.

To read previous Retirement Planner columns online, go to www.newsday .com. You can e-mail Karen Klein at retire@newsday.com. Where To Learn More Ed Slott's "IRA Advisor" (www. irahelp.com) and Seymour Goldberg's Web site (www.goldbergira.com)