Saving for Retirement: Invest in an IRA


Saving for retirement is a top priority for many service members and savers. In addition to taking advantage of Thrift Savings Plan (TSP) and civilian employer-sponsored retirement plans, you can save for retirement and get some tax benefits in the process, by putting money in an Individual Retirement Account (IRA).

Who qualifies to make IRA contributions?

Anyone who earns an income (or receives alimony) can put money in an IRA. Couples can also contribute money to an IRA for a non-working spouse.

Each person can put up to $4,000 in an IRA for the 2006 tax year, as long as your contributions do not exceed your earned income. If you're 50 or older, you can contribute an extra $500 for a total of $4,500. Each year, you have until the April 15 tax filing deadline to make your IRA payment for the previous tax year.

There are two main types of IRAs: traditional and Roth. Each has its own set of rules and offers different tax benefits.

Traditional IRAs are open to anyone up to the age of 70 1/2. Money in a traditional IRA grows tax-deferred. In other words, you won't have to pay taxes on any earnings until you take the money out. That allows your money to grow faster than it would if you had to pay income tax each year on those earnings.

Traditional IRAs Offer Tax-Deductible Contributions

Contributions to a traditional IRA are tax-deductible -- an attractive feature for many people. That's because you get a portion of your IRA payment "back" immediately in the form of a lower tax bill.

What's more, if you are not eligible for an employer-sponsored retirement plan, you can make tax-deductible contributions to a traditional IRA. You can also do so if your income falls below certain levels, regardless of your retirement plan status.

In 2005, couples filing a joint tax return who report adjusted gross income of up to $70,000 (or singles with income up to $50,000) were eligible to make fully deductible contributions to a traditional IRA. Also, taxpayers with incomes slightly above those limits -- $79,999 for couples and $59,999 for singles -- can make partially deductible contributions.

When you put money in a traditional IRA, you can't withdraw funds before you reach age 59 1/2 without paying the penalty, but there are exceptions. Some people consider this a disadvantage of traditional IRAs, but it can help keep your retirement savings on track.

Once you retire and withdraw money from a traditional IRA in retirement, you will have to pay ordinary income tax on any earnings and tax-deductible contributions. But you won't have to pay federal taxes on withdrawals of non-deductible contributions. Depending on where you live, you may have to pay state taxes on those withdrawals.

ROTH IRAs Offer Tax-Free Withdrawals

The benefits of a Roth IRA differ from the benefits of a traditional IRA. You can't make tax-deductible contributions to a Roth IRA. On the other hand, the money you put in a Roth IRA grows not just tax-deferred, but tax-free. In other words, you won't have to pay any federal taxes or state taxes in most states on your earnings when you take money out, provided you meet certain requirements. You are also less likely to have to pay a tax penalty if you withdraw money early from a Roth IRA.

There are no age limits for contributions to a Roth IRA, so long as you have earned income. On the other hand, there are income limits. However, those limits are quite high. Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income is less than $110,000 if you're single and $160,000 if you're married filing jointly.

Where Can You Open an IRA?

Virtually all major financial services companies -- such as banks, credit unions, brokers, insurance and mutual fund companies -- offer IRAs and make it easy to open an account.

A reputable mutual fund company that offers a wide selection of funds, low costs and reasonable minimum investment requirements, is a particularly good option for many. Many of the top companies also offer excellent educational materials to help you pick the best funds for you.

Regardless of where you decide to open an account, your retirement savings will get a real boost if you commit yourself to make annual contributions to an IRA.

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