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Show Retirement tips IRA's are still alive and well in investments Not that the tax return filing deadline has passed and the new rules governing Individual Retirement Accounts have taken full effect, many Americans are wondering what to do with their retirement investments. What many do not realize is that IRAs are by no means gone, but still are among the better retirement investment vehicles available. In fact, the most important component of IRAs, tax deferred growth, has not changed at all with tax reform. The following questions and answers, offered by James L. Burton of J.L. Burton and Associates associated with State Mutual Life Assurance Company of America, explain the new ruels governing IRAs, the types of IRA accounts available, and how they compare now with other retirement investments. When did the tax rules concerning IRAs take effect? The new rules became effective for the taxable year 1987. While you could make a fully deductible contribution until April 15, 1987, without worrying about the change in the laws, those contributions were for 1986 tax purposes only. Exactly how did the tax status of IRAs change after April 15? Full tax deductibility of IRA contributions is now restricted to individuals who do not participate in qualified-employer plans and individuals with adjusted gross incomes of $25,000 or less (or married couples filing jointly with incomes of $40,000). There is a phase out of deductions so active participants with income between $25,000 and $35,000 and married couples with income between $40,000 and $50,000 can still enjoy a partial deduction of their contribution. Are the earnings on IRAs still tax deferred? Yes. Tax deferred growth, the most important component of an IRA, did not change at all. All IRAs have the advantage of growing on a tax deferred basis. Can I still only deposit $2,000 a year? The limit is still $2,000 for an individual. However, with a non-working spouse the contribution can be increased to $2,250. That is calL-l a ip"'.'""! IRA. These limits apply regardless of the deductibility rules. Do these change affect money deposited into IRAs before tax reform? The changes do not affect any pre-tax reform deposits. However, if you do make non-deductible IRA payments and subsequently make an early withdrawal, some of that withdrawal withdraw-al will be considered to be from pre-reform contributions; thus, some of your withdrawal will always be taxable. Are IRAs still a good investment? Definitely. Remember that tax reform did not attack the most important advantage of an IRA, its tax deferred growth. For example, if you deposited $2,000 per year in a regular (taxable) investment over 20 years, the account earning 10 percent would accumulate $79,000. That same investment for an individual in the 33 percent tax bracked in a tax deferred IRA would grow to $1 14,500 at 10 percent per year. ' What are the "best" types of IRAs? This depends on your investment objectives, other assets and risk tolerance. Because of compound interest and tax deferral, the rate you can earn on your investments will dramatically affect the funds you accumulate. For example, if you were to invest $2,000 per year in a certificate of deposit paying 7 percent it would be worth $87,730 in 20 years. At 12 percent you would A!1,3?Lin 20 vears- increase at 15 percent (to $235,620) and 20 percent (to $448,051) are even more dramatic. This all sounds great but you have to be willing to take additional risks for these potentially higher returns. Are there better ways to save for retirement? ir! As far as individual taxpayers are concerned there are no necessarily "better" ways to save for retirement. There are :' additional vehicles available such as the HR-10, 401(k) and employer sponsored pension and profit sharing plans that everyone should explore if they are available to them. Will the rules concerning IRAs be changing again? There is no way to know if Congress will act to change the ,j j IRA rules again. Remember, many felt the old system was . j untouchable during the tax reform debates. Obviously, that was - c not the case. What's the most important thing I should know about invest-ing invest-ing in an IRA? Do itl But look before you leap. Analyze your own needs and investment philosophy before you act. In mak- -i ing the investment vehicle decisiion find a professional who can help you direct your funds into suitable investments. |