Here is a letter I sent to friends this week about which Individual Retirement Accounts are out there and which one I use. Working title: "Free Money from the Government if You Pay Taxes and Have Some Savings."
(Note: this was the topic of my appearance this past Wednesday on Be Happy, Dammit (Karen Salmansohn's show on Lime Radio at channel 114 on Sirius). By the way, it looks like my appearances will be weekly on Wednesdays at 8:30am.
It's that time of year when I have to remind you of something, and it is sad that mostly rich people with connected accountants get this benefit that is available to everyone and works better for the the middle class than the rich. So if you can afford it, which basically means you have some savings, I will encourage you now to take advantage of an Individual Retirement Account (IRA).
Please please please make a contribution to your IRA. There are two types:
The Traditional IRA: You can contribute up to $4000, assuming you don't have certain types of pension plans or a high income, and you get a tax deduction for the amount you contribute today. The money compounds tax free until you take it out (which you cannot do without paying a penalty of 10% before you are 59 1/2). But when you take it out it is taxable.
The Roth IRA: With this one, you get no tax deduction when you put the money in, but it still grows tax free (compounding interest works twice as hard when you don't pay tax). When you take the funds out, they are not taxable.
What would Neubert do? Well, I don't trust the government to keep the Roth IRA totally tax free. Remember when social security benefits were invented? Neither do I. My grandmother does and she tells me they were tax free. When you put your contributions into social security, they were not tax deductible and the benefits were not supposed to be taxable. But lo and behold, here we are more than sixty years later and social security benefits are taxable and get reduced if you have income over a certain amount from other sources. I turn 59 1/2 in just under twenty years. Given the way the government is spending like crazy, just when it should be running a surplus thanks to all the baby-boomers paying their highest taxes, I bet they won't be in the financial position to keep their end of the IRA program. That government will be looking to change the law the same way they did with social security.
So I'd take my tax deduction now while I'm alive and can use the extra money to beef up my savings. That means going with the traditional IRA if I have a choice.
Here are some cool links to IRA Resources:
Frequently asked IRA questions at the IRS website
AARP Guide to Individual Retirement Accounts My Favorite. This non-partisan, unaffiliated site's easy to read charts).
To be sure, check with your accountant or financial institution to find out if you are eligible and what account is exactly right for you.
How do I actually open an IRA if I don't already have one?
Walk to/drive over/email/phone your current bank, mutual fund company or broker. They will be able to easily open the account and transfer from your taxable savings/brokerage/mutual fund account. They love IRA's and they tend to be loyal and you should never have to pay a fee. I took a survey of my friends at ThePanelist.com and found they had IRAs at Ameritrade, Fidelity, Chase Bank, Charles Schwab, Citibank, Vanguard and Morgan Stanley. That list is by no means exhaustive. Nearly any financial institution that can hold your money can open an IRA account for you.
Do I defer?
Also, don't be afraid to defer filing your tax return if it means you can get that IRA money contributed, even if you have to re-figure your new (lower) post IRA contribution taxes. But remember to make a tax payment with your deferral forms if you might owe additional taxes to the IRS and don't want to pay a 10% penalty for your underpayment.