Individual Retirement Accounts

Taking Stock of the Situation With George Shaw

George Shaw

An Individual Retirement Account (IRA) is an excellent tool to use when planning your retirement savings and investments. However, since there are a couple of types of IRAs, you’ll want to make sure you choose the right one for your financial situation and your retirement goals.

Roth IRA or Traditional Deductible IRA? That is the question. If you’re eligible for both the Roth and the Traditional Deductible IRA, consider choosing the Roth if you:

1.  don’t need the immediate tax savings of the Traditional variety;
2.  think you’ll be in a significantly higher tax bracket in retirement.

With the Roth IRA, you need to assume that you will be maintaining your Roth for at least five years and won’t begin withdrawing earnings until age 59.

Just about the only time the Traditional Deductible IRA may give you more money at retirement than the Roth IRA is if your tax bracket becomes significantly lower—let’s say it drops from 27% to 10%.

If you’re eligible for both the Roth and the Traditional Nondeductible IRA, consider choosing the Roth because it:

1.  offers better withdrawal rules. For instance, under certain circumstances you can withdraw money from your Roth IRA and pay no federal taxes or penalties if you've had the account for five years.

If you’re only eligible for the Traditional Nondeductible IRA, consider choosing that IRA over a regular taxable investment because of the tax-deferred growth benefit—unless you plan to use the money before you reach age 59.

One of the first things to address is how much you can contribute.

IRA Annual Contribution Amounts for 2003 (See chart below)

Take advantage of these contribution amounts while you can. Unless Congress acts, contribution amounts will revert back to $2,000 after 2010.

The amount you can contribute to an IRA each year will continue to rise, reaching $4,000 in 2005 and $5,000 in 2008. After 2008, the contribution amount will be adjusted annually for inflation in $500 increments. If you’re age 50 or older, you can also add an extra $500 catch-up contribution to your IRA account through 2005 and an extra $1,000 in 2006 and later. These increases will no longer apply after 2010 unless Congress renews them.

For more detailed information about IRAs and your best choices, call George Shaw or Wendy Kester at PB Investment Services, 270.575.6636 or 270.575.6630.

Contribution Amounts for 2003
  If you are under age 50 If you are age 50 or older
Roth IRA $3,000 $3,500
Traditional Deductible IRA $3,000 $3,500
Traditional Nondeductible IRA $3,000 $3,500
Combination of both Roth and Traditional IRAs $3,000 $3,500