Investments & Retirement Planning
IRAs
Traditional IRAs
A traditional IRA is a personal savings plan that offers tax benefits to
encourage retirement savings. You can contribute up to $5,000 starting in
2008 (indexed for inflation thereafter). You and your spouse together may
contribute double the annual limit, even if your spouse has little or no
compensation. Contributions may be fully or partially tax deductible,
depending on certain factors. Investment earnings in a traditional IRA grow
tax deferred, but distributions will be subject to federal and possibly
state income tax (excluding the portion that represents nondeductible
contributions).
Roth IRAs
The Roth IRA is another type of personal savings plan that offers tax benefits to encourage retirement savings. The same contribution limits that apply to traditional IRAs also apply to Roth IRAs. With a Roth IRA, however, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.
Investing using IRAs
Traditional IRAs and Roth IRAs are not themselves investments, but rather tax-advantaged vehicles in which you can hold your retirement investments. Once you open an IRA, you then need to select the specific investments to fund the IRA.
If you are age 50 or older, you can make an additional "catch-up" contribution to a traditional or Roth IRA, over and above the regular IRA contribution limit. The annual catch-up contribution amount is $1,000 for 2006 and later years.
The annual IRA contribution limit for any year (including the catch-up amount) is a combined limit that applies to all of your IRAs. For example, if you have both traditional IRAs and Roth IRAs, your total contribution to all of your IRAs for 2007 cannot exceed $4,000 ($5,000 if age 50 or older).