IRA Accounts:
How to Make Your IRA Contribution Count Today

Money Saved With an IRA

Amid the current economic crisis, saving for retirement is more important than ever.

Opening an Individual Retirement Account (IRA) or contributing the maximum amount allowed to an existing IRA account is vital to your future financial well-being.

"Think of it as retirement insurance," says Jennifer Hartman, CFP, a financial planner for Greenleaf Financial Group in Los Angeles. "We have every other type of insurance—life, health, car—we should also have insurance for our future."

Hartman suggests everyone begin contributing to an IRA as early as possible throughout their years of employment.

Financial planners also emphasize that an optimal savings plan would be to add money each year to an IRA as well as contribute funds designated to a company-sponsored plan such as a 401(k) or 403(b).

The two go hand-in-hand, says Russ Francis, CFP, a financial planner with Portland Financial Advisors in Beaverton, OR.

"I advise my clients to maximize their contributions to their Roth-because of the tax-free nature of the plan—then put at least enough into their company plan to get any matching funds," Francis says. "That's an important strategy."

Traditional IRA Accounts

A traditional IRA is a tax-deferred account in which you can take pretax earnings and invest in certificates of deposit (CDs), stocks, mutual funds or money market accounts (MMAs). Because your contributions to a traditional IRA are pretax, they reduce your overall taxable income. That means you pay less taxes today. Once you're at least 59½, you'll be able to withdraw funds from your traditional IRA. If you withdraw funds before you've reached 59½, you may be subject to a 10 percent tax penalty on the withdrawn amount.

Depending on how much you earn and whether you're covered by a traditional retirement plan at work, such as a 401(k) plan, you can put away up to $5,000 into a traditional IRA (up to $6,000 if you're age 50 or older).

If you are under the age of 70½, and your 2009 adjusted gross income (AGI) is less than $65,000 if you're single (or $109,000 if you're married and filing jointly), you can make a tax-deductible contribution to a traditional IRA.

If your employer does not offer a traditional IRA, you may make a contribution of up to $5,000 for the 2009 tax year (up to $6,000 if you're age 50 or older) no matter how much income you earn.

Roth IRA Accounts

A Roth IRA is a retirement account funded with after-tax income. For instance, as long as your income in 2009 was less than $120,000 as an individual (or less than $176,000 if you're married and filing jointly), you can contribute up to $5,000 to a Roth IRA (up to $6,000 if you're age 50 or over). If you're married and your income is below the $176,000 threshold, you and your spouse are each entitled to open up a Roth IRA and make the maximum allowable contributions.

The big benefit to a Roth IRA is that under current IRS rules, your contributions grow tax-free forever.

You may only contribute to a Roth IRA if you have earned income, as opposed to income from dividends, royalties or capital gains. But anyone can open up a Roth IRA as long as you earn less than the IRS-specified amounts.

You can withdraw your contributions to a Roth IRA at any time. To withdraw earnings tax-free, you must be at least 59½ and have held the account for at least five years. If you withdraw funds before you're 59½, and they are not a qualified distribution, your earnings may be subject to income tax and a 10 percent penalty.

Roth IRA Accounts vs. Traditional IRA Accounts

If you can't afford to contribute to a Roth IRA and a traditional IRA at the same time, you should think about where your retirement income is going to come from and which type of account will serve you better over the long haul.

Many financial planners counsel their clients to open up a Roth IRA, especially if they expect clients to have the same tax rate after they retire or when they are ready to make withdrawals. Roth IRAs give you flexibility to fund your retirement without triggering an additional tax bill.

"The Roth is the best option out there right now," Francis adds. "The only downside would be if you were going to be in a lower tax bracket when you withdraw [money]. Most people tend to have more money in the future. I don't see where lower income taxes would be the case, unless the laws are changed."

Roth IRA Conversions

If you earn less than $100,000 per year, current tax law allows you to convert a traditional IRA to a Roth IRA. While you'll have to pay income tax when you convert your tax-deductible, tax-deferred traditional IRA to a Roth IRA, the assets in your new Roth IRA will then grow tax-free forever.

"This is a great conversion opportunity because the markets have fallen so much," Francis says. "If you can afford the tax bite now, why not let the money grow in a tax-free vehicle in the future?"

In 2010, the income limits on traditional IRA to Roth IRA conversions will be eliminated, allowing anyone to convert their IRA funds to a Roth IRA.

Discover Bank offers IRA CDs, both Traditional and Roth. Many of these accounts can be opened online at or via 24-hour Customer Service at 1-800-347-7000.

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