Issue 15

Still Time to Invest in an IRA

Charlotte Crawford, Consumer and Family Economics Educator

An Individual Retirement Account (IRA) can be a great tool for retirement saving. And with tax time right around the corner, it's a good time to invest.

The current rules for investing in an IRA include:

  • All contributions to an IRA must be earned income.
  • Contributions can be made until April 15 for the previous year.
  • You can have more than one IRA, but if you're under age 50, you cannot contribute more than a total of $3,000 per year. In 2002, if you are over age 50, you can contribute an extra $500.
  • Contributions are 100 percent tax deductible if you are not participating in an employee-sponsored retirement program.
  • If your income is low enough, you might receive a tax credit for your IRA contribution.

There are several types of IRAs, each with its own advantages. There's the Traditional IRA in which contributions may or may not be 100 percent tax deductible. The Spousal IRA is for a spouse with no earned income. A Rollover IRA keeps the tax advantage of a 401(k) or 403(b) plan after a job change. There's also the Education IRA, now the Coverdell Education Savings Account, and the Roth IRA with tax benefits at withdrawal time.

Which IRA is best for you? There is no simple answer. You must decide whether a tax deduction is worth more to you now or later. That depends on your future tax rate and your ability to pay the taxes now. If you are not eligible for a deductible IRA, then a Roth IRA is a good choice. If you have a lot of years before you withdraw money from your IRA, the more sense it may make to open a Roth or to convert a traditional IRA to a Roth. Although you can't claim your contribution to a Roth IRA as a tax deduction when you put the money in, the Roth IRA promises greater benefits over time since your earnings are never taxed.

Should you convert your traditional IRA to a Roth? With the help of an IRA calculator, analyze your situation carefully. Always check the underlying assumptions of any analysis program! Use at least three calculators to check for consistent answers. Your tax accountant or financial planner can help you make a decision about conversion.