Most people dream of having financial freedom in retirement. However, as their retirement date approaches, some people realize they haven't accumulated the savings they'll need to live as comfortably as they'd like in their later years.
So even if you're saving in an employer-based retirement program and a voluntary plan, think about investing in an IRA. Depending on the type of IRA you choose, your earnings will grow either tax deferred (with a Traditional IRA) or tax free (with a Roth IRA). (Remember, though, that IRA withdrawals before age 59½ are generally subject to a 10% early withdrawal penalty, as well as ordinary income taxes.) Here are some basic facts about investing for retirement through an IRA.
For the 2009 tax year, the annual IRA contribution limit is $5,000, with an additional $1,000 if you're age 50 or older. You must fund the IRA with earned income, which can come from your job, self-employment, part-time work (even if you're a student) and alimony. "Passive" income, such as investment income (from dividends or interest), or income from trusts, pensions or annuities, does not qualify as earned income.
If you have a job but your spouse does not, there's an exception to these contribution requirements. In this case, you and your spouse can currently contribute up to $5,000 each for the 2009 tax year, plus an additional $1,000 if either of you is 50 years of age or older.
Deciding which IRA is best for you depends on your current tax bracket, your anticipated tax bracket in retirement and when you expect to begin withdrawing funds. Briefly, you will have an advantage from contributing to a tax-deductible Traditional IRA only if you can deduct the contributions from your taxes and anticipate being in a lower tax bracket in retirement. If you expect to be in the same or a higher tax bracket in retirement, then a Roth IRA may be preferable because you'll be able to make completely tax-free withdrawals, provided you meet the five-year holding period and have reached age 59½.
Additionally, with a Roth IRA, you're not required to begin minimum withdrawals at age 70½. This makes the Roth IRA ideal for estate planning, since you can potentially leave more funds to your heirs. See Traditional vs. Roth: Which is right for you? to learn more.
There's no minimum age limit for contributing to an IRA. All that's required is earned income of some form. So even if your child is nine or 11, earns money from baby-sitting, delivering newspapers or working in a family business, he or she can have an IRA. If the child is a minor, however, you must set up the IRA as a custodial account. Also, any relative or family friend can fund the account, provided the contribution does not exceed your child's earned income. Just imagine how much more financial freedom your children can potentially have later in life if they begin saving for retirement now.
But you can be too old
Once you reach the calendar year in which you turn 70½, you cannot contribute to a Traditional IRA. Roth IRAs don't have this limit; you can contribute as long as you, or your spouse, have earned income. But with Traditional IRAs, you must begin receiving required minimum distribution (RMD) payments by age 70½ or potentially face a 50% IRS penalty on the amount you should have withdrawn.
However, note that The Worker, Retiree and Employer Recovery Act of 2008 waived the RMD requirement for IRAs and employer-sponsored retirement plans for calendar year 2009. This legislation won't help people who were hoping to avoid taking a withdrawal in 2008, or have already done so. However, the U.S. Treasury Department is considering relief with respect to minimum distributions made during 2008.
If you have retirement assets with more than one employer, think about consolidating your assets with a single financial company to monitor your savings more efficiently and, eventually, to make receiving income easier. IRAs can be ideal for consolidation because they preserve your assets' tax-deferred status and may provide more allocation options than your previous employer plan provides. Just be sure to check the terms of your existing investment, since certain other charges and taxes may apply.
Before transferring assets or replacing an existing annuity, be sure to carefully consider the benefits of both the existing and the new product. There will likely be differences in features, costs, surrender charges, services, company strength and other important aspects. There may also be tax consequences associated with the transfer of assets. Indirect transfers may be subject to taxation and penalties. Consult with your own advisors regarding your particular situation.
You should consider the investment objectives, risks, charges and expenses carefully before investing. TIAA-CREF or its affiliates do not offer tax advice. Please consult your tax advisor.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
© 2009 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017
