By Kevin FitzGerald
My husband and I are finally sitting down to finish our taxes. We both work, but I’m not sure if we can deduct our IRA contributions. Also, if we can’t deduct our IRA contributions, does it make sense to still contribute?
P.M., Woodside, Queens
Who’s got close to $1 trillion? According to the Employee Benefits Research Institute, that’s how much money Americans have invested in Individual Retirement Accounts and Keogh plans.
It’s not surprising the amount is so large. Even though the ability to make a tax-deductible contribution to a traditional IRA is based on certain income limits, many Americans are still eligible for a full or partial deduction. And, for those who can’t deduct the full amount, the most important benefit of IRA investing still remains: long-term, tax-deferred compounding.
To illustrate: if you contributed $2,000 annually to an IRA for 35 years, your account would grow to $372,204, assuming an 8 percent rate of return. In a taxable investment at the 28 percent tax bracket, the same contributions would only grow to $224,000 — a difference of $148,204!
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Saving for retirement is
more important than ever
Today, Americans need all the help they can get to save for retirement. While our nation’s personal savings rate remains abysmally low, at around 4.5 percent, people are facing more financial challenges than ever. People are living longer on average, so, consequently, their retirements are lasting longer. In addition to saving for their own retirement, many people are financially supporting their elderly parents, while also keeping up with the soaring costs of college education and health care.
It’s estimated that Social Security and company pension benefits will provide for less than half the amount needed to retire comfortably. On top of that, home appreciation, a traditional investment vehicle for building personal assets, is no longer reliable. Americans will have to make up for this shortfall if they want to ensure a comfortable retirement. And, for most people, an IRA would play an important role in a good retirement savings plan.
Getting the most out of your IRA
There are many steps you can take to make the most of your IRA investments. Here are a few ideas:
€ Determine if you are eligible for a tax deduction. If you are married and neither you nor your spouse are covered by an employer-sponsored retirement plan, you can each still deduct a full $2,000 contribution to an IRA, regardless of your filing status or income. If both of you are covered by a retirement plan, you may both make a fully deductible contribution if your joint adjusted gross income is below $50,000 and you may both make a partially deductible contribution if your joint AGI is between $50,000 and $60,000.
If one of you is covered by a plan and the other is not, you may both make fully deductible contributions if your joint AGI is below $50,000. If your joint AGI is between $50,000 and $60,000, the covered spouse may make a partially deductible contribution and the non-covered spouse may make a fully deductible contribution. If your joint AGI is between $60,000 and $150,000 the non-covered spouse may make a fully deductible contribution. If your joint AGI is between $150,000 and $160,000 the non-covered spouse may make a partially deductible contribution.
€ Look at how your IRA assets are invested. Your old investment strategies may no longer be working. Sit down with your financial advisor to review your investments and develop an appropriate plan to potentially maximize returns in today’s investment climate.
€ Consider consolidating your IRAs. This could help you save on maintenance fees and simplify your record keeping.
€ Look at your IRA as part of an overall retirement savings plan. There are many other savings vehicles that could play a valuable role in an overall plan. Such as 401(k)s, annuities, and other tax-advantaged investments.
€ Talk to your financial advisor. He or she can help you develop an overall investment plan to make sure your golden years are truly golden.
The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy of completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Kevin FitzGerald is First Vice President-Investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1-800-654-6162, ext. 448.