| IRA stands for Individual Retirement
Account. An IRA is a personal savings account
for people who are employed and their spouses.
The primary advantage of an IRA is that
savings and dividends accrue untaxed until the
money is withdrawn. Funds are permitted
to be withdrawn without penalty at age 59 1/2.
The government requires at least a "Required
Minimum Distribution" (RMD) of IRA funds when
you turn 70 1/2. The maximum annual
contribution to an IRA from 2005 to 2007 is
$4,000 for single people; $8,000 for married
people who file a joint tax return.
People age 50 and older may make an additional
$1,000 "catch-up" contribution. These
limits increase from 2008 and beyond.
There are two primary types of IRAs:
"Traditional" and "Roth". With
"Traditional" IRAs, annual contributions are
considered "before tax" meaning that you will
not be taxed on the contribution until the
funds are withdrawn. Additionally, your
contribution may be partially or fully tax
deductible.
"Roth" IRAs differ from "Traditional" IRAs
in that annual contributions are considered
"after-tax" contributions. As such,
annual contributions to Roth IRAs are not
tax-deductible. Like Traditional IRAs,
however, earnings in the account accrue tax
free until they are withdrawn.
Advantages of Roth IRAs are: (1) Funds are not
taxed at all when they are withdrawn. (2) The
government permits people with Roth IRAs to
continue to contribute to this type of
retirement account beyond age 70 1/2 if the
individual is still employed. (3) Roth IRA
owners are not required to take "Required
Minimum Distributions" when they turn 70 1/2.
Please consult a tax accountant for
additional details on Traditional and Roth
IRAs.
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