Planning & Education | Think About an Individual Retirement Account

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Think About an Individual Retirement Account

As long as you or your spouse has income from work, you may be eligible to contribute to an IRA. Just like employer-sponsored plans, IRAs also offer tax-deferred savings while typically providing for a much wider investment selection. And with recent changes to tax legislation, you can take advantage of increased dollar limits to IRA contributions — $4,000 for the years 2005 – 2007, and $5,000 for 2008. The "catch-up" provisions at age 50 allow you to contribute an additional $500 for 2005 and $1,000 for the year 2006.

Whether you should choose a traditional IRA or a Roth IRA will depend on your personal financial situation (Learn more about your IRA options). In a traditional IRA, all contributions grow tax-deferred and depending on your filing status and modified adjusted gross income, and whether you are an active participant in an employer plan, contributions may also be tax-deductible. You can make contributions up to age 70½, at which point you are required to start withdrawing from the account. These mandatory withdrawals are referred to as required minimum distributions (RMDs) and, other than deductible contributions, are taxed at your ordinary income tax rate.

Unlike traditional IRAs, contributions to Roth IRAs are never tax-deductible. However, withdrawals on earnings are generally tax-free, as long as the account has been open for five or more years before the withdrawal and one of the following conditions has also been satisfied:

The account holder is age 59½ or older
Owner is deceased or disabled
Owner is a first-time homebuyer with a lifetime limit of $10,000 on withdrawals
As with a traditional IRA, you must have earned income to be eligible to contribute to a Roth IRA, and your income must be within certain limits.

For those who aren't eligible for a traditional IRA or a Roth IRA, a variable annuity may be right for you. This alternative retirement investment offers tax-deferred growth during the accumulation phase with a wide range of investment options. Learn more about variable annuity products.

For investors who are small business owners or employees of a small business, a Simplified Employee Pension — Individual Retirement Account (SEP-IRA) allows you to invest money towards your retirement in a tax-deferred account. Sole proprietors can contribute up to 20% of their profits from self-employment, and owners of incorporated businesses can contribute up to 25%. Employee contributions to SEP-IRAs are subject to the same limitations placed on traditional or Roth IRAs, and depending on income and other factors, contributions to traditional IRAs can be either deductible or nondeductible.

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There are significant current income tax penalties for non-qualified distributions from IRAs. These include a 10% federal penalty tax and 20% withholding tax if withdrawn prior to age 59½. Please consult your tax advisor to determine if an IRA is a suitable investment for you.

This information is general in nature and is not intended to constitute tax advice. Please consult your tax advisor for more detailed information on tax issues and for advice on your specific situation.

Investors should consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. Download a prospectus that contains this and other information about a fund, and read it carefully before investing.