Insights & Advice


Resist the “Buts,” Contribute to Your IRA in 2008

Although the deadline, April 15, is still a good three months away, it might be time to think about contributing to your traditional IRA. That’s the individual savings plan that allows each of us to contribute up to $5,000 this year tax free ($6,000 if you’re over fifty) toward our retirement. We’re urged to contribute the maximum each year.

I see your eyes rolling and I can commiserate. The vast majority of us are still struggling to make ends meet. What with the kid’s clothes, putting food on the table and paying a higher price at the pump just to get to work it’s how much, if any, can we “afford” to contribute.

Maybe it’s the timing. Somehow all the good intentions we had last year about contributing evaporate as the first of the holiday season credit card bills begin to arrive. Even though we can pay them we still “feel” poor. We resolve to start contributing “next year.” After all, retirement is a long way off. Sound familiar?

But maybe its time to change our thinking since tax deferred savings plans are a good deal for a variety of reasons and not all of them have to do with retirement. The assumptions behind the retirement plan are that your money earns income tax-free through investments. With the right investments you could possibly double your money every ten years. At age 70 ½, your are required to take a yearly minimum required distribution taxed at a rate presumed to be lower than the one you are in now. If you withdraw the money prior to 59 ½ you pay a ten percent penalty plus tax.

The first point to remember is every dollar you contribute now is still yours. Those you don’t are gone forever. The government takes them and can spend it on things like $250 toilet seats or the war in Iraq. There are also other benefits.

IRAs are a great vehicle for acquiring the down payment on that first house, the number one dream of most American families. That’s right, a one- time withdrawal of up to $10,000 is allowed penalty free for first time homebuyers.

You can also withdraw funds for education, either your own, for your spouse or your kids. That’s not all. Do you work with your hands? If you do, one of your nightmares may be a serious injury on the job. A penalty-free withdrawal to cover medical expenses exceeding 7.5% of adjusted gross income is also an option.

There are more benefits but you get the idea. So what’s the best way to begin? Open an IRA at any bank and have your company direct deposit money from your paycheck. How much is up to you but $96.15 a week would max out your yearly contribution. What tends to happen is that we hardly miss the weekly shortfall in our paycheck. An added bonus comes at the end of the year. We usually receive a bit more from the government than we expected at tax time. By the way, if you’re married, your spouse is also eligible to contribute the same amount in a separate IRA account.

Next time we’ll talk about the non-deductible Roth IRA and why it makes just as much sense for some people to contribute after tax money in exchange for tax-free income after only five years.

Posted in Retirement, The Retired Advisor