Q: What’s an IRA?
A: IRA stands for individual retirement account. Think of it as a retirement savings account that you set up, usually with the help of your financial representative or banker. It is separate from any other savings tool you might have already, including any retirement savings you have through your employer.
Q: I’ve heard about both Roth IRAs and traditional IRAs. What’s the difference?
A: A traditional IRA may allow you to deduct annual contributions (up to IRS-specified limits) on your tax return. If you can deduct them, you don’t pay taxes on those contributions or any potential earnings until you take the money out. When you do, withdrawals are taxed as ordinary income. In some situations a 10 percent early withdrawal penalty may apply.
A Roth IRA doesn’t give you the immediate tax break on your annual tax bill. Instead, when you take the money out, you don’t pay taxes on the earnings if your withdrawal meets certain IRS guidelines regarding your age, how long you’ve owned the Roth IRA and other variables.
Q: How much can I put in an IRA?
A: In 2008, you can put up to $5,000 in a traditional IRA, a Roth IRA or a combination of the two. If you are married, both you and your spouse can contribute that amount—or $10,000 total per married couple. And, if you’re age 50 or older, you can put in an additional $1,000 each, called a “catch-up contribution,” for a total of $6,000 each in 2008. These figures are adjusted every few years to account for inflation.
Q: Do I have to make a certain amount to have an IRA?
A: Anyone who has earned income, such as wages, salary, tips or bonuses, can contribute to a traditional IRA, even if that income is less than $5,000 a year. But, the amount you put in can’t be more than your income and can’t exceed the overall $5,000 contribution limit.
It’s important to note: If you are active in a pension plan, such as a 401(k) plan, your ability to deduct an IRA depends on your modified adjusted gross income (MAGI). That’s the number on your tax return that includes your wages, interest income and the like.
For 2008, your MAGI must be $53,000 or less to fully deduct contributions to a traditional IRA for a single filer and $85,000 or less for joint filers. If your income is more than this but less than $63,000 for a single filer and $105,000 for those filing joint returns, you can still deduct a portion of your annual IRA contribution.
With a Roth IRA, as long as your income is below a certain amount ($101,000 for a single filer in 2008; $159,000 for joint filers), you can contribute the maximum allowed. If your income is more than this but less than $116,000 for a single filer in 2008 and $169,000 for those filing joint returns, you can contribute a reduced amount to a Roth IRA. If you earn more than this, you may want to consider contributing to a traditional IRA.
Q: What are the rules for making withdrawals?
A: Typically, if you take money out of a traditional or Roth IRA before you’re age 59 ½, you may be hit with a 10 percent penalty tax in addition to applicable ordinary income tax, unless an exception applies. These penalty-free exceptions include withdrawals that cover major medical expenses, post-secondary education and first home purchases. Roth IRAs offer a unique benefit of tax-free distributions because you add after-tax dollars and can remove your contributions free of tax and IRS penalty at any time. However, earnings accumulated in a Roth IRA must meet certain requirements to be tax free at the time you take the money out. Try to resist early withdrawal when possible, and keep in mind that the whole point of funding an IRA is to have money available at retirement.
Q: Which is better: a traditional IRA or a Roth IRA?
A: The choice depends on several factors, including your current income, your overall savings strategy and how far away retirement is for you. For instance, if you’re young and in a lower tax bracket, it might make sense to go with a Roth. But if you need the tax deduction that a traditional IRA offers today, that’s the route you should consider. These are just guidelines, of course. There always will be exceptions.
Q: If I already contribute to a 401(k), why should I consider an IRA?
A: Given that inflation will take a bite out of the money you put away today, it’s critical to save for retirement in as many ways as possible. Plus, in a 401(k), your employer chooses the pool of investments. An IRA lets you decide. And don’t forget, you can add money to both a traditional and Roth IRA in the same year. Just know that the annual contribution between the two can’t exceed $5,000—or $6,000 if you’re 50 or older.
Q: Can I roll over my 401(k) to an IRA?
A: Yes. Generally, you can roll over a 401(k) plan with your former employer into an IRA. However, you cannot fund an IRA with a rollover and also deduct that contribution.
Q: So, how do I get started?
A: The best place to start is with your Thrivent Financial representative. Together, you can talk about retirement goals, examine the other tools you’re already using and decide which IRA is best for you.