INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
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The individual retirement account is a personal, tax-deferred
account for people who are employed.
You can set up an IRA at almost any bank, brokerage, insurance
company, or mutual fund. Again, there are a wide variety of investment options
to choose from, and your earnings are untaxed until they are paid out of the
Tax law lets you deposit up to $4,000 for 2005 to your IRA—
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. The Tax Relief Act
of 2001 increased the IRA contribution limits in stages. For 2005 through 2007,
the contribution limit will be $4,000—$8,000
for married people who file a joint tax return. The law also allows taxpayers age 50
and above to make an extra "catch-up" contribution of $500 ($1,000
in 2006) for each of those years. These figures are totals for all traditional
and Roth IRA accounts combined. For 2008 and beyond, the IRA contribution limit
is set to reach $5,000 ($6,000 if over age 50).
As with employer-sponsored tax-deferred plans, there are caveats.
Any money you withdraw before age 59½ is taxed at your ordinary rate;
plus, there may be a 10 percent penalty tax. Traditional IRAs require you to
take your money out at age 70½. One bonus: if you were not permitted
to take your IRA contributions as a tax deduction while you were working, you
don't have to pay taxes on them when you take your money out (your accrued earnings
are still subject to taxes, however).
The Roth IRA is a variation that lets you withdraw principal and
earnings tax-free after age 59½, 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 70½, and you can keep contributing to
them as long as you like as long as you have earned income.
Next, another variation on the IRA for small business employees.