Traditional IRAs

Purpose

In this article we would like to give insight into a small section of retirement planning. We will introduce what a traditional IRA is, along with how to get an IRA. There is also a section showing how retirement planning can be beneficial to an individual. Examples of deductions and possible outcome from contributing are also provided.

What is an IRA

There are different types of IRAs (Individual Retirement Account), rather than discussing them all we will focus on the Traditional IRA. A Traditional IRA is a tax shelter created by the government to help citizens plan and pay for retirement. The reason it is called an Individual Retirement Account is because the account is individually held, and one person is limited to one Traditional IRA. The money placed in a Traditional IRA is not taxable until withdrawal, which can only be made after the age of 59 ½. During the time the money is in the IRA, it can be invested in certificates of deposit, stocks, bonds, mutual funds, money market accounts, U.S. gold and silver coins, and real estate. The government also provides incentives for establishing an IRA by allowing for the contribution amount to be tax deductible. Not all contributions are tax deductible there are stipulations that regulate the deductibility. Below is information showing the qualifications for tax deductibility, which is determined by income bracket and if a company retirement plan (401k) is held by an individual. The information below is provided by www.etrade.com.

· If you or your spouse do not participate in a company retirement plan: 100% deductible

· If you participate in a retirement plan at work:

· If only your spouse participates in a retirement plan at work:

Adjusted Gross Income	You Can Deduct
Up to $150,000	100% of your contribution
$150,000 – $160,000	Less than $3,000
Over $160,000	No deduction allowed

There are limits placed on the amount that a person or couple can contribute to an IRA. The current contribution limit is $3000 annually. To compensate for inflation, the government has scheduled increases in the contribution amount. The expected increases are presented below:

Tax Year	Regular Contribution Limit
2002	$ 3,000
2003	$ 3,000
2004	$ 3,000
2005	$ 4,000
2006	$ 4,000
2007	$ 4,000
2008	$ 5,000
2009	$ 5,000
Beginning 2009, contributions will increase in $ 500 increments. (information by www.investopedia.com)

Benefits of a Traditional IRA

Retirement is something that should be done while young because once you start getting older retirement is getting closer. Saving money over a longer period of time allows individuals the pleasure of using more of their income at retirement. There are many benefits that come from the Traditional IRA which include (provided by the website www.wachovia.com):

• Contributions may be tax deductible (consult with a financial advisor).
• Every one under the age of 70 ½ with earned income is eligible.
• There is no income limit.
• Taxes are paid when earnings are withdrawn at retirement.
• By deferring tax a higher compounded growth may occur.
• Variety of investment choices including: stocks, bonds, mutual funds along with protected certificate of deposits and money market accounts.
• Withdraws start at age 59 ½.

A Traditional IRA should be considered if a higher income and tax rate is being paid, and a lower tax rate is expected at the time of retirement. Because many students are graduating and will be earning a higher income and will be taxed at a higher rate, a traditional IRA could be the answer. Also, the Traditional IRA allows for tax deferred growth along with a possible tax deduction. With a Traditional IRA taxes are paid at the time of retirement when a lower tax rate may be present, which will possibly lower the amount paid in taxes. The Traditional IRA may not be beneficial to everyone; an analysis by a qualified professional should be done in order to determine the best possible plan in regards to all personal finance issues as pointed out by the website www.finance.cch.com.

The description provided by www.finance.cch.com shows a possible outcome of a Traditional IRA. Starting at the age of 24 if a contribution of $3,000 is made annually, at an expected rate of return of 9%, until the age of retirement at 65 the Traditional IRA could be worth $1,207,584 before income taxes. The results are explained in more detail in the financial calculator results below:

How to open a Traditional IRA

When opening an IRA you will need to choose where you would like to open an IRA. Any commercial bank or credit union will be able to open an IRA, but at a credit union you must be a member of their establishment. A new account representative will direct you through the account opening process. Before opening the IRA some initial questions should be asked:

1. Which tax year will the contribution be going towards?
2. Will the contribution be made in one lump sum or over the course of the year?

These questions are important to ask yourself before going into open the IRA. Knowing which tax year the contribution will be applied toward is very important because the contribution can be applied to last years taxes until April 15^th of the next year. By knowing if the contribution will be made in one lump sum or in smaller payments over the course of the year this will determine what type of account designation can be used.

There is certain information that is needed in order for an IRA to be opened. The information that is needed is found on the banks application. The application that we will follow is from Zions Bank; please refer to the application if there are any questions on where a section is located. Here are some step by step instructions on how to fill out an application in order to get an IRA:

1. Fill out customer information as needed (name, social security number, demographics, etc.).

2. Mark the appropriate box of where the source of the IRA funds will be coming from.

3. Write the name of the beneficiary (ies). Including their address, relationship, social security number, date of birth, and the percentage of the IRA that they will receive in the event that something were to happen to you. (The percentages for all beneficiaries should equal to 100 percent.)

4. Write the name of the contingent beneficiary (ies). The contingent beneficiary is the beneficiary to the beneficiary.

5. Read the fine print under the section of the beneficiary designation.

6. If the money is going to be invested by a brokerage firm, write in the name of the brokerage company along with the address and telephone number.

7. Read the print in the agreement to participate section noting that it states that the information that has been given is true and accurate to your knowledge.

8. Verify the information making sure all areas are complete and accurate.

9. Sign the signature line that states “signature of participant”.

10. Ask any questions to the new account representative.

After the application is completed and the agreement to participate has been signed the account representative will give you a copy of everything you have signed. Along with information that states the account terms and the guidelines for the IRA.

Conclusion

An Individual Retirement Account is essential to all of us. Planning for our future is very important, especially when we want to be financially secure. Knowing that in your future you have money saved can eliminate the worries of how you will live at the time of retirement. Living off of social security is not the answer. Retirement is a very important time for all individuals and making sure that your retirement is secure is one of the best things that you can do, and the Traditional IRA can help to accomplish this security.

Retirement planning is essential to everyones future, and one of the best ways to put away money for your future is with an IRA. The Traditional IRA has many benefits that include: tax deductibility, tax-deferred growth, and no income limits. Saving for retirement is made easier with the Traditional IRA because taxes are paid at retirement and when a lower tax bracket could be present. Being able to put money into a Traditional IRA can help many individuals get a tax break, something most everyone would like. The Traditional IRA has many benefits that can help many individuals, but stipulations are present and not everyone is helped by a Traditional IRA. So for those without an Individual Retirement Account we recommend that you visit your bank of choice and start saving for your retirement today, and don’t forget the earlier you start the better prepared you will be for your future.