|
March 20, 2000 -- Opening an IRA before
April 17 will lessen the pain of Uncle Sam's 1999 tax bite.
If you don't participate in an employer-sponsored
retirement plan or even if you do but you're single, and your
Adjusted Gross Income is less than $41,000, or you're married
and filing jointly with an AGI of less than $61,000, you can
open a tax-deductible IRA. Many people will be able to deduct
their full contribution -- up to $2,000. Others, depending
on their income, will be able to at least take a partial deduction.
A $2,000 contribution to an IRA will save
you $560 in taxes if you're in the 28 percent tax bracket.
A contribution of just $500 would lop $140 off your tax bill.
In addition to the tax deduction, the
earnings in an IRA grow tax-deferred until you withdraw the
money -- presumably, when you're retired and in a lower tax
bracket.
Joanne Carter, IRA Product Manager at
PaineWebber
in New York, says the common issue is that the people who
need to save for retirement need to pay off the mortgage,
the rent or education for their kids.
"But at the same time, people are
becoming aware they have to save for their own retirement."
she says. "Pension plans are becoming a thing of the
past and they won't have enough money if they don't save for
retirement."
Many
are missing out
"A lot of people don't take advantage of IRAs,"
says Jim McHugh, head of IRA product management at MetLife
in New York. "They're not aware of some of the recent
tax law changes that have opened the deductibility limits
for people."
A major tax overhaul in 1986 restricted
the ability to deduct IRA contributions from taxes, but McHugh
says Congress realized that was discouraging people from saving
for retirement and eased the restrictions considerably in
1997.
You can open an IRA in-person or online
with many brokerage firms, banks, credit unions, mutual funds
and insurance companies.
McHugh advises asking the IRA adviser
about the types of products that are available.
"Are they just fixed-interest or
a full array -- annuities, brokerage accounts, mutual funds?
Also ask if they offer services such as asset allocation."
MetLife marketing vice-president Barbara
Hume says proper asset allocation is the key to making the
right financial decision.
"Decide risk tolerance, how long
the money will be in the account. Are you a conservative investor
vs. how much should be in moderate to high risk vehicles."
Confused?
Park it for now
If you're having trouble deciding the best way to allocate
your money but you still want to open an IRA and get the tax
break, consider parking your money in an IRA money market
account. You'll earn some interest, get the deduction on your
1999 taxes and give yourself some extra time to decide what
stocks, mutual funds, etc. you want to invest in for the long
haul.
Even if your contribution to an IRA isn't
tax-deductible or is only partially deductible, experts say
it's smart to open one and to also look at some of the alternatives.
"A Roth IRA gives the same benefits
as a non-deductible IRA in terms of tax-deferred growth, but
it also gives the opportunity to enjoy tax-free retirement
income," says Jim McHugh. "If your full $2,000 contribution
isn't deductible, then contribute what is deductible to a
tax-deductible IRA and put the rest in a Roth or an IRA annuity
contract."
McHugh says non-qualified IRA annuities
have the same tax-deferred growth as a non-deductible IRA
and withdrawals are taxed in the same manner, but they don't
have the $2,000 contribution limit and they don't have the
requirement to start withdrawing money at age 70-1/2.
|
