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Design an IRA Strategy That’s Right for You

Retirement security has received tremendous media attention recently, as the administration pursues its Social Security privatization plan, and both supporters and detractors make their case. Whatever the outcome of that proposal, it is a given that Americans need to do a better job in preparing for their senior years. For millions of people, an IRA (individual retirement account) is part of the formula for success.

Perhaps the most important advantage of IRAs as a savings instrument is that they offer important tax advantages--either now or later.

The two basic types of IRAs are traditional and Roth. Traditional IRAs are divided into tax-deductible and nondeductible types. Contributions to Roth IRAs are not tax-deductible, but their earnings can be distributed tax-free if certain conditions are met. All of this makes a difference when owners or beneficiaries begin withdrawing the funds. For a primer on the basic provisions of IRAs, see IRS (Internal Revenue Service) publication 590.

How much can I contribute?

For 2005 through 2007, the contribution limit for both Roth and traditional IRAs is the smaller of either $4,000 or your taxable compensation for the year. If you are age 50 or older, that limit rises to the smaller of your taxable compensation for the year or $4,500 (2005) or $5,000 (2006 and 2007). The amount a member can contribute to Roth IRAs is phased out based on the member’s taxable income. A member who attains age 70 ½ by the end of a year cannot make regular contributions to traditional IRAs for that year.

What kind of IRA is best for me?

The advantage of a traditional IRA is that it may provide a tax deduction for the year. If you are in the 25% tax bracket and contribute $4,000 to a traditional IRA, you reap an immediate $1,000 in tax savings. But the IRS considers the entire $4,000 plus all earnings taxable when you withdraw the money. The tax deduction of a member who participates in a retirement plan or whose spouse participates in a retirement plan is phased out based on the member’s taxable income.

A Roth IRA, by contrast, offers no immediate tax advantage, but all earnings can be tax-free at withdrawal. If the requirements for tax-free distribution are met, all proceeds come to you with no tax liability. Therefore, if you expect to reap substantial earnings on your IRA investment over time, the Roth option might be preferable. If you need the tax advantage immediately, a traditional IRA might be best. Remember: The basic purpose of an IRA is to provide financial security in the future.

Can my spouse participate?

Yes. If your husband or wife does not have a paying job, you can make a contribution in his or her name each year.

The bottom line...

In the three decades since it was first introduced, the IRA has become a popular and flexible tool to help Americans prepare for their future financial security. It offers a host of options designed to meet the needs of a variety of lifestyles and circumstances, and can make the difference between just getting by and living the retirement life of your dreams. But because the rules regarding IRAs can be tricky, it’s a good idea to check with a financial pro at Bronco Federal Credit Union as you develop your plan.

Copyright 2005 Credit Union National Association Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.