Cents and Sensibility
Cents and Sensibility
Question: Can you explain the regulations on deductibility of IRA contributions? How to calculate
IRA deductionsAnswer: IRAs, one of the best ways to save for retirement, are available in two varieties: Traditional and Roth.
Traditional IRAs allow tax-deductible contributions for anyone not covered by an employer-sponsored retirement plan. People covered by employer-sponsored plans can make deductible contributions if their adjusted gross income (AGI) is under certain limits. These limits are gradually rising each year, and by 2007, joint filers with AGI of less than $80,000 will be able to make fully deductible contributions. Individuals with AGI of less than $50,000 will be able to make fully deductible contributions by 2005. Joint filers with AGI between $80,000 and $100,000, and individuals with AGI between $50,000 and $60,000 will qualify for partially deductible contributions. If only one spouse is covered by an employer-sponsored plan, the other can deduct his or her IRA contribution as long as their combined AGI is less than $150,000. Traditional IRAs allow penalty-free withdrawals before age 59 - 1/2 for death, disability, systematic distributions, college expenses, first home purchase (up to $10,000), medical expenses exceeding 7.5 percent of AGI, and health insurance premiums if unemployed for 12 consecutive months.
Roth IRAs are available for married couples filing jointly with AGI of less than $150,000 and individuals with AGI of less than $95,000. Contributions to Roth IRAs are not tax-deductible, but distributions are tax free and penalty free if they meet two conditions: 1) the assets have been in the account for five years, and 2) the withdrawal is made after age 59 - 1/2 or for a qualified purpose (death, disability or up to $10,000 for a first home).
Q: I retired last year, and, like most retirees, worry about money. Should I do anything differently with my money?
A: The average 65-year-old retiree can expect to live another 15 years. Even with low or modest inflation, the cost of living will rise during that time. This reality should encourage you to do two things financially.
First, retirees should invest a part of their savings in investments that have rising income and the potential for growth. Growth of principal and rising income will be essential to maintaining a constant standard of living in retirement.
Second, retirees should reinvest part of their income, if possible. This may involve reinves- ting stock or fund dividends, reinvesting interest into a certificate of deposit, postponing withdrawals from an IRA or 401(k) plan, or investing your monthly Social Security check. This plan of action provides you a safety valve of income that you can "turn on" at some point in the future if needed.
The last recommendation is to stay diversified.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com