Should I Set Up a Traditional IRA?

Since they were created, traditional individual retirement accounts (IRAs) have grown in popularity with investors. IRAs offer some very attractive benefits.

For many people, IRAs offer a substantial current income tax deduction. If you qualified in 2005, you could make a tax-deductible contribution of $4,000 to your IRA (or if married, you could make a combined contribution of $8,000). The contribution limit for 2005 through 2007 is $4,000, and it will increase to $5,000 per year ($10,000 for joint filers) in 2008.

In addition to this deduction, the assets in an IRA grow tax deferred. Over a period of years, this tax deferral can add up to quite a significant advantage.

Contributions and earnings are taxed as ordinary income when they are withdrawn. In addition, withdrawals prior to age 59¹/2 are subject to a 10 percent federal tax penalty.

Because Congress has tightened the requirements for IRAs, the number of people who qualify for a full deduction has been cut.Before you jump into an IRA, it’s important to determine whether it will meet your retirement planning needs.

Will Your Contributions Be Deductible?

The first thing to determine is whether your contributions are deductible.

If you are an active participant in a qualified retirement plan — such as a simplified employee pension or a 401(k) plan — your IRA deduction may be reduced or eliminated.

For active participants of qualified plans, the IRA deduction drops by $10 for every $50 of income above the bottom figure on the phaseout ranges.

Nondeductible contributions may necessitate some very complicated paperwork when you begin withdrawals.

If your contributions aren’t deductible, you may be better served by another retirement plan.

An IRA Could Make Sense for You

If you qualify to make tax-deductible contributions and can leave your funds in place, IRAs often make sense. An IRA could be a valuable addition to your retirement and tax planning efforts.

By working with a financial professional, you can determine whether an IRA makes sense for you.

This material was written and prepared by Emerald Publications.

GE 37909 (02/07)