Investing For Your Future
Monthly IFYF Investment Message
February 2004
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An Individual Retirement Account (IRA) enables workers with earned income (salary from a job or net earnings from self-employment) to save and invest for retirement. IRAs are not an investment, per se, but, rather, a special classification for tax purposes. The actual IRA account investment can be in stocks, bonds, certificates of deposit, or mutual funds. Arrangements to open an IRA account can be made with a stockbroker, bank, or mutual fund company.
In the early 1980s, federal legislation created a tax-deductible IRA for anyone with earned income. Significant changes in 1986 established income limits for participants in an employer sponsored retirement plan that eliminated tax deductibility of IRA contributions for many people. The Roth IRA became available January 1, 1998. While not deductible, it offers federal income-tax-free growth.
Federal tax law limits 2003 and 2004 contributions to either a traditional or Roth IRA to $3,000 for a worker with earned income. An additional $3,000 can also be saved for a worker's spouse, regardless of whether or not the spouse is employed. In addition, workers or spouses who are age 50 or older can contribute an additional $500 ($3,500 total).
Minimum deposits required to set up an IRA vary with the financial institution and type of investment. For example, a bank may require $500 to purchase a CD for an IRA and a mutual fund may require a $1,000 minimum deposit.
There are a number of income limits with respect to IRAs:
- Roth IRAs are fully available to joint filers whose current adjusted gross income (AGI) is less than $150,000. There is a phase-out range between $150,000 and $160,000. You cannot contribute to a Roth IRA if your AGI is more than $160,000.
- Roth IRAs are fully available to single filers whose AGI is less than $95,000. No participation is allowed if your AGI is more than $110,000. The phase-out range is between $95,000 and $110,000.
- A working spouse who is not covered by an employer-sponsored plan may have a fully deductible Traditional IRA, even if the spouse is in an employer-sponsored plan, if the household AGI is less than $150,000. The phase-out range is from $150,000 to $160,000.
- People with earned income who are not in an employer-sponsored retirement plan, regardless of income level, may qualify for a tax deductible Traditional IRA. In other words, their contribution is made with before-tax dollars. Another group of taxpayers who can deduct their Traditional IRA contribution are those with an employer-sponsored plan that file jointly with an AGI in 2003 under $70,000. (This amount will be gradually increasing each year, reaching $80,000 in 2005. In 2004, it will be $75,000).
- The maximum annual AGI for a Traditional IRA, under which single filers can qualify for a tax deduction, is $50,000 in 2003. This amount is gradually increasing and will be $55,000 in 2004 and $60,000 in 2005.
Remember: you have until April 15, 2004 to make a contribution to an IRA for 2003.
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Barbara O'Neill, Ph.D., CFP, CRPC, AFC, CHC, CFCS
Interim Extension Specialist in Financial Resource Management Professor and Family & Consumer Sciences Educator, Sussex County Rutgers Cooperative Extension