Go Ahead

s the holidays fade behind us, enter the fire-breathing dragon of our fiscal year--income tax season. This is when Americans ask why, in the rush of all that holiday giving, didn’t we take time to give something special to ourselves.

       For most Americans, an individual retirement account (IRA) could be the special something that keeps on giving for a lifetime. In fact, an IRA might be the component of your retirement preparation that makes the difference between just getting by and having the time of your life.

Planned savings in a tax-deferred account can give you peace of mind, not only in retirement but during the years leading to retirement.

       Most experts agree that retirement planning should contain three basic supports, often compared to a three-legged stool. Social Security is one support leg. It provides a minimum benefit which, although essential, cannot meet all our living expenses. Company-sponsored pension or retirement plans are the second leg. They bolster our living standard but may not provide an income level we need to enjoy the goods and services we’re used to. But the stool won’t keep you off your backside without a third leg--a program of regular personal savings to supplement Social Security and pension plans that completes and stabilizes the support structure.
       Financial gurus also point out that Americans tend to overestimate the size of future retirement income. And, we underestimate the expense of our retirement needs. These two miscalculations often lead to financial hardship for retirees, and produce additional burdens for families recruited to supplement seniors’ income in their later years.

Over the past decade, tax law changes have created confusion concerning benefits, eligibility, contribution limits, and timing for IRAs. Ten frequently asked questions regarding this important retirement resource are:

Who is eligible to deduct contributions to an IRA?

IRA contributions are fully deductible for individuals who are not participants in a company retirement program, and whose spouses do not have a plan available to them. Contributions also are fully deductible for employees earning up to $25,000 for an individual, or $40,000 for a married couple. For incomes above these limits, an IRA contribution may be partially deductible.

How much money can I put into an IRA?

You can contribute up to $2,000 each year out of your earned income. For married couples with only one income, the limit for 1996 contributions (made until April 15, 1997) is $2,250. Two-income married couples can contribute up to $4,000 per year--and for 1997 contributions, the limit is the same for one-income married couples.

Do I have to contribute the maximum to an IRA each year?

No. You can contribute as much as you can afford to put away for retirement each year. This is especially important for people with fluctuating incomes. In a year when your income is down, you even may choose to skip payments and resume contributions the following year.

Does it matter when during the tax year I make contributions?

You can open or add to your IRA at any time during the year, and contribute any amount up to the limits noted above. You’ll do better in the long run with a consistent saving program. Still, the earlier in a tax year you make contributions, the more you’ll benefit from compounding--the adding of interest to interest--over time.

The magic of compounding:
If you put away $1,000 a year for 10 years, then let it earn a 6% annual percentage yield for 20 more years, you'll have more money than if you wait for 10 years and then save $1,000 for 20 years.

Can I choose some other form of IRA investment vehicle later?

Yes. You’re free to choose the investment vehicle or vehicles you want to use in achieving your long-term retirement goals. It’s your money, and you can make changes within the IRA structure whenever the time is right for you.

Are early withdrawals allowed?

Yes, but usually at a price. Normally, there’s a 10% penalty if you withdraw money before you reach age 59 1/2. And, you must pay regular income taxes on the amount you withdraw if it was a tax-deductible contribution going in.

Can I avoid early withdrawal penalties?

To avoid penalties, understand that an IRA is a long-term proposition. To take advantage of the benefits, you have to be willing to delay gratification for years--in some cases, for decades. But the ultimate benefit is worth the sacrifice.
And, if you must have access to the money early, ask the IRA adviser about substantially equal withdrawal arrangements.

How can I start saving through an IRA?

Simple. Just call the credit union and ask to talk to a savings counselor. We’ll give you the appropriate forms to set up your account and guide you through the process. If your employer offers direct deposit, you can direct a specified amount to go into your IRA each payday. A $2,000 annual contribution requires only $38.46 each week to reach your goal. And at the credit union, you pay low or no fees to set up your IRA.

If I’m making contributions to my employer’s pension plan, are there benefits in an IRA?

There sure are. You may not be able to deduct your current IRA contributions, but the account earnings aren’t taxable until you withdraw them. Depending on your age, earnings could amount to a substantial sum over 10, 20, even 40 years because of compounding.
       Another important consideration is investment portfolio diversification. Chances are, you invest your employer pension funds in a mix of equities--stocks or stock mutual funds--and in fixed-rate investment vehicles, such as bonds. An IRA may give you the safety of a federally insured savings program, a feature especially valuable to those individuals planning to retire in the near future.

Can I still make a 1996 IRA contribution?

Definitely. You can make contributions right up to the day your tax return is due, April 15. And tax time is a great time to begin a consistent retirement savings program. Put yourself on a savings binge. Save a little each week or month. As with all savings, the key is regularity.

A credit union IRA combines safety, tax-deferred earnings, and the long-term benefits of compounding. With an IRA, you take charge of your own financial future. The financial well-being and peace of mind it provides could be the most important gift you’ll ever give yourself.

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