Maximize Your IRA

Individual retirement accounts (IRAs) continue to be one of the most powerful ways to accumulate funds for a financially secure retirement. 

• IRAs are convenient ways to save money.
• IRAs are available to everyone with wages.
• Earnings within IRAs are not subject to current taxation.
• Contributions may be deductible in some cases.
• Additional contributions may be made by those ages 50 and above.
• With self-directed IRAs, there is investment flexibility.
• There is flexibility when you begin taking money out of IRAs, especially with Roth IRAs.

The keys to maximizing the ultimate value of your IRA are simple – contribute as much as you can, contribute as early as you can and earn as much as you can.  Here are four ways to put those keys to work.

Make Contributions

Everyone with earned income (wages) is eligible to contribute up to $4000 to an IRA for 2005.  You can contribute to a regular IRA regardless of your income.  It may be tax-deductible if you are not a participant in a company sponsored plan or if your 2005 adjusted income is below certain levels ($50,000 for those filing single tax returns and $70,000 for those filing jointly). 

Roth IRA contributions are not deductible, but can be made by those with 2005 adjust gross income $95,000 (single) or $150,000 (filing jointly).

For 2006, the contribution limit remains at $4000.  It may be tax-deductible if you are not a participant in a company sponsored plan or if your 2006 adjusted income is below certain levels ($50,000 for those filing single tax returns and $75,000 for those filing jointly).  Non-deductible Roth IRA contributions can be made by those with 2006 adjust gross income $95,000 (single) or $150,000 (filing jointly).

Take Advantage of the Catch-up Provision

For the past several years, individuals age 50 and above have been eligible to contribute extra amounts to their IRAs.  For 2005, those individuals can contribute an extra $500 to their IRAs.  For 2006, the limit increases to $1000.  For someone that turned age 50 in 2005 and that makes an extra $500 contribution for 2005 and $1000 from 2006 until they retire at age 65, the extra accumulation would be over $26,000 assuming they earned 7% on their funds.

Make Contributions Early

The earlier you make contributions, the earlier your money begins earning on a tax-deferred basis.  The latest you can make 2005 contributions is April 15, 2006 (or the extended due date of your tax return).  The earliest you can make 2006 contributions is January 1, 2006.  By making your contribution early, you are more likely to make an extra contribution over your working career and it adds up.  For someone age 30, it can mean an extra $29,004 (assuming an earnings rate of 6%).  For a 45 year old, the extra funds could amount to over $12,000.

Invest Your IRA Wisely

Your IRA is, or will become a significant part of your net worth.  How it is invested deserves the same attention you give your other investments.  Be sure to include your IRA in your overall investment planning and apply the same principles of asset allocation, diversification and risk tolerance.  Because the funds in your IRA will remain there for extended periods of time, you should take a long term approach with how the funds are invested.  If you choose a lower risk fixed income approach, consider longer term CDs instead of shorter-term savings accounts or money market funds.  If you are considering equity investments, remember these funds will have many years to grow and choose wisely.  You will ultimately be responsible for your retirement and the decisions you make on managing your investments are important.  Doing your homework and using the services of a qualified professional can make a large difference.

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