|By SARAH B. AUBREY
ANDERSON, Ind. — At the dawn of a new year, it’s often time to take stock of the past year’s successes and failures, and set goals for the next year.
If the goal is to save more money, remember to include saving for retirement in a monthly budget. Financial planners urge farmers, especially, to diversify outside of farm ground and large equipment assets and add some different investments. Thus, considering a Roth or Traditional IRA might make sense. The term IRA is used to refer to an individual retirement account. There are two types, the Roth IRA and the traditional IRA.
“The most significant difference between a traditional IRA and the Roth IRA is that the traditional IRA offers tax-deferred growth and the Roth IRA offers tax-free growth,” explained Steve Warner, vice president of Investments for Robert W. Baird and Co.
“The traditional IRA may be more suitable for individuals who may be in a lower tax bracket in retirement, and the Roth IRA offers increased benefit for those who may be in a higher tax bracket in retirement.”
Both types of IRAs can be owned simultaneously, but a combined annual contribution limit applies. Talking with a financial advisor or tax planner can help make the decision on which type to contribute to each year.
Larry Gregurash of National City Investments in Anderson explained that contributions to a traditional IRA may be deductible for the current year’s taxes, which could be appealing to some farmers.
Conversely, contributions to a Roth IRA are made with after-tax dollars, thus the annual contribution are not tax deductible, but the distributions are tax free.
“It’s important to note that all contributions must be left in a Roth IRA for five years or the distributions will be treated (taxed) like a traditional IRA,” Gregurash added.
Gregurash and Warner work with an individual farmer’s needs to determine which type of IRA is suitable.
“For example, if you’re in your 50s or older, you might be more interested in seeking tax deferral, so in that case I’d recommend a traditional IRA,” Gregruash said.
The IRA is the vehicle or account that holds investments that investors choose.
“IRAs can be funded with CDs, stocks, bonds, mutual funds and savings accounts. Real estate is eligible, but has several complicating features that make them unavailable in most custodial accounts,” Warner said.
Investments in these accounts can be bought and sold similarly to other brokerage accounts. A key difference with IRA accounts is that money invested is subject to penalty if withdrawn prior to age 59 1/2. It isn’t suitable to set aside money for short-term savings in an IRA account as the penalty is 10 percent plus the money withdrawn is considered taxable income.
Gregurash said there are a few circumstances when money withdrawn early from an IRA isn’t taxable. He advises clients to cover that with a tax professional first.
Contribution and other limits
“The contribution limits in 2005 and 2006 are $4,000 per person. If you’re over 55, you can add an extra $500 per year called a catch-up contribution,” said Gregurash.
These limits are subject to income limitations, which is $160,000 per year for a married couple and $110,000 per year for a single person. A tax preparer can advise taxpayers if they fall under these limitations.
Working spouses can contribute on behalf of nonworking spouses up to the limit each year, as well. Another idea includes parents contributing to a child’s IRA account in lieu of pay for work, or if the child get paid by someone else and has earned income.
“You just can’t contribute more that 100 percent of annual compensation,” noted Gregurash.
A traditional IRA requires annual minimum distributions at some point in the future.
“The traditional IRA requires that the owner start mandatory distributions at age 70 1/2,” said Gregurash.
For retirees not wanting to take that minimum, there may be an advantage to owning a Roth IRA as that type of account does not require an annual distribution.
A new or existing traditional or Roth IRA account can be contributed, up to the maximum, by April 15 each year. There is still time to contribute for 2005 or contributions can begin for 2006. For more advice on these IRA accounts, contact a financial advisor or accountant.