A Grand New Contribution
If you were waiting for the day when you could sock away some serious dough in your individual retirement account, the time has arrived. Beginning in 2008, workers can contribute up to $5,000 per year to an IRA, and those aged 50 and older can contribute up to $6,000.Although these new limits are the only recent development for the IRA, what’s most appealing about the IRA has passed the test of time: It still offers a tremendous opportunity for workers of all ages to use the power of tax deferral in pursuit of their long–term savings goals.Too Low for Too LongFor years, people have complained that the IRA contribution limits are too low. The IRA was created in 1974 with a $1,500 limit that was raised to $2,000 in 1982. In 2001, lawmakers answered the contribution limit complaints with a series of scheduled incremental increases that culminated in 2008. In 2009 and beyond, the IRA contribution limit will be indexed to inflation. Over a 30–year period, a worker who contributed $5,000 per year to an IRA earning a hypothetical 8% annual return could accumulate an additional $340,000, compared with a worker who contributed just $2,000 per year. This hypothetical example is used for illustrative purposes only. It does not represent any specific investment. Actual results will vary.Even if you participate in an employer–sponsored retirement plan, you may still be eligible to contribute to a deductible IRA (see table). If you have assets in a former employer’s plan, rolling them into an IRA may give you more options and greater control over your money.Contributions to a traditional IRA are tax deductible (subject to certain income limits), and any earnings in the account are not subject to income tax until withdrawn. IRA withdrawals (also called distributions) are subject to ordinary income tax. Distributions taken prior to age 59½ are subject to an additional 10% federal income tax penalty, except in cases of death, disability, or a first–time home purchase (up to a $10,000 lifetime maximum).Forty-seven million U.S. households own at least one IRA.1 Does it make sense for you to take advantage of this year’s higher contribution limits? Call us to learn more. 1) Investment Company Institute, 2006Fee-Based financial planning
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