As you do your taxes for 2006 and plan for 2007, do not forget to consider an IRA as a part of your plan. IRAs allow monthly contributions that can be done automatically form a checking or saving account. Over time these monthly contributions can grow into significant sums of money. You can contribute to an IRA for tax year 2006 until April 16 this year, because the 15th is on Sunday. IRAs are easily established. Most financial institutions, insurance agents, stock brokers, and financial advisors can help you establish an IRA. What type of investment vehicle you invest your IRA money in can range from CDs, mutual funds, stocks, bonds, to many more exotic things like oil and gas wells, or gold coins. What ever you select, you need to be comfortable with the investment. The advice of a financial advisor can be a great help in selecting the best product for your particular situation. There are two types of IRAs, Traditional and Roth.
The Traditional IRA allows contributions to be made before taxes. This extra money then grows untaxed until you are 59 ½ or you retire. You must start taking out Required Minimum Distributions (RMD) at 70 ½. If your income tax will be less in retirement this is a great tool to reduce your taxes today. There are some restrictions on the deductibility of you contribution if you have an employer sponsored retirement plan available to you. If you are single and make over $50,000 your pre-tax contribution will be reduced until at $60,000 it is eliminated. For married filing jointly it is $80,000 to $100,000 for 2007. If you are over these income levels you can still contribute, but you will not receive the tax deduction. Growth will be tax deferred until withdrawn. The gains will be taxed, but the money you contributed will be withdrawn tax free. At 70 ½ you can not make further contributions to a Traditional IRA.
If you can not receive the tax deduction, you may want to consider the Roth IRA. Roth IRA contributions are all after tax moneys. The contributions grow tax deferred. After 59 ½ you can withdraw money from the Roth IRA completely tax free (contributions and growth). The Roth IRA is great for people who do not pay much tax or think they will be in the same or higher tax bracket when they retire.
Also, if you do not anticipate needing all or any of the money you contribute to the Roth it is a great estate planning tool because the Roth does not require minimum distributions at 70 ½ and it is inherited by your heirs completely income tax free. The Traditional IRA is inherited as taxable income. There are income requirements for the Roth. Single individuals can make a full contribution with an income up to $95,000. It is reduced until at $110,000 of income you can not contribute to the Roth. Married filling jointly $150,000. Reducing till $160,000. If you are married filling separate you can not contribute to a Roth IRA. There is no age limit on contributions to a Roth IRA. As long as you have earned income you can contribute to the Roth.
The Roth IRA can be a great education savings tool for grandparents. Contributions to the Roth are still under the control of the grandparent. It grows tax deferred and the withdrawals are tax free when the education bill comes (assuming the grandparent is 59 ½ years old). If the grandparent dies before the child goes to school, making the child the beneficiary of the Roth IRA directs the money to the child and is still income tax free to the grandchild
Both IRAs require contributions to come from earned income (wages). A person with only investment income can not contribute to an IRA. You can contribute up to a maximum of $4000 of earned income per year to an IRA. Married couples can contribute $8,000 per year as long as between them they have $8,000 of earned income. If you are age 50 or older there is a catch up provision that allows you to contribute $1000 more each year toward the IRA.
As the motto of Hancock Saves says Build Wealth Not Debt, the IRA can be a great tool for you to build Wealth for yourself and your retirement or to pass on to your heirs. Anyone can build wealth and an IRA is just one tool to help you get started! If you would like more information about IRAs or other wealth-building tips, contact Angela Crist, Hancock Saves campaign coordinator at 419-422-3851 or crist.66@osu.edu. You can build wealth!
