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IRAs deserve individual attention right now

Updated: May 3, 2013 12:14PM

Originally published: February 28, 2005

This is the season for Individual Retirement Accounts. It’s time to make your last-minute contribution for 2004 -- and open a new IRA for 2005. You can open a traditional IRA if you’re under age 701/2, and have earned income at least equal to the amount contributed. (Dividends, interest and rental income don’t count as earned income for IRA purposes.)

Some people have had IRAs for 20 years now, and their original $2,000 investment is well on its way to becoming a significant part of a retirement portfolio. In fact, in 30 years of average stock market returns of 10.4 percent, you could expect your $2,000 contributions to be worth nearly half a million dollars. Plus, in recent years, the contribution limits have increased.

So don’t wait until the last minute to get organized and open your account.

Here’s what you can contribute: For 2004, the limit is $3,000 -- or $3,500 if you’re older than age 50. In 2005, the limit rises to $4,000 -- and $4,500 for those older than 50.

‘I’ stands for ‘Individual’

Even non-employed spouses with no income can have a spousal IRA if they file jointly. It doesn’t matter if the money comes from the working spouse’s income. Just remember, the “I” in IRA stands for individual. There is no such thing as a “joint” IRA account.

You can open an Individual Retirement Account at almost any financial institution. If you start your account at a bank, you can put the money in a money market account or certificate of deposit. You can contact a no-load (no commission) mutual fund company, and choose a mutual fund for your IRA investment. You can open an account at a brokerage firm, and pay for the advice of a broker in choosing your investments.

You can deduct your IRA contribution on your income tax if you’re not covered by a company retirement plan. And there are some unbelievably complicated rules for deducting your IRA contribution if an individual or spouse is covered by a company plan. Basically, you can deduct your contribution even if you are covered by a company plan if your income falls below certain limits.

For single filers covered by a company plan, the deduction phases out at an income level of $45,000, and the deduction disappears when income is over $55,000 on your 2004 tax return. Next year, that limit increases $5,000.

Individuals who are covered by a plan, and are married and filing jointly lose a portion of the deduction at an income of $65,000, and it completely phases out at $75,000 in 2004. That limit also increases $5,000 in 2005.

Individuals who file a joint return and are not covered by a company plan, but have a spouse who is covered, start losing a portion of the deduction at $150,000 of income on a joint return, and the deduction phases out completely at incomes over $160,000 in both 2004 and 2005.

But even if you can’t deduct your IRA contribution from your taxes, all the money in the account grows tax-deferred.

You can’t withdraw any of the money in your IRA before age 591/2. If you do, you not only pay income taxes on the withdrawal, but a 10 percent federal tax penalty. This is a long-term investment.

There’s another rule to consider. You must start withdrawing money from your IRA in the year after you reach age 701/2. Those rules are complicated, and the subject of another column. When you do withdraw money from your IRA, you’ll pay ordinary income taxes on all those gains inside your account, with the exception of the Roth IRA.

The Roth IRA

A Roth IRA doesn’t provide you with a deduction on your income taxes -- but all the money comes out tax-free at retirement. You’re not required to make withdrawals during your lifetime, leading to some interesting opportunities to pass along assets to your heirs.

Income restrictions limit the use of Roth IRAs. As with traditional IRAs, contributions must be made out of earned income. But single filers with incomes over $110,000 in 2004 and 2005 cannot contribute to a Roth IRA. And married couples filing jointly must have combined income below $160,000.

A final thought: Remember to name a beneficiary for your IRA. If you die without spending the money, your heirs may be able to stretch out that tax-deferred growth into a real fortune.

Remember, time is money. That’s especially apparent in your IRA, and that’s The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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