Raw Finance

The severe economic recession has some individuals questioning whether they can or should continue to make contributions to an Individual Retirement Account (IRA) (one should note that the official IRS designation for IRA is Individual Retirement Arrangement).  For those who have continued streams of income this year, the answer is generally yes.  Now, it may be better for some to use income to pay down debt rather than save for retirement.  As with any financial decision, the particular facts and circumstances of each individual or household dictate the best course of action.  So no advice, no matter how sound it may be, will ever apply to every situation.  But, generally speaking, contributions to a traditional or Roth IRA (or both) offer great tax advantages toward saving for retirement and should not be abandoned without good reason for doing so.

Contributing to an IRA is one issue, but investing the amounts contributed is what really makes IRAs successful.  The rapid decline in the stock market may be one reason why an individual may no longer see IRAs as a viable retirement planning tool.  However, IRAs are not required to invest in stocks and the accounts are not limited to equity investing. In fact, an IRA may hold a wide range of assets, with some exceptions.  Also, because of the tax advantages, IRAs are better suited to holding certain types of assets, like Treasury Inflation-Protected Securities (TIPS).  For example, when TIPS increase in value in a tax year due to an increase in inflation, the individual holding the TIPS must pay income tax on the amount of the increase, even though the individual does not actually receive the value of the TIPS increase in that year.  If TIPS are held in a traditional IRA, the tax is deferred, and in a Roth IRA, increases in value are not taxed at all.  Thus, sound investment advice must cover all avenues of retirement planning.

For the 2009 tax year, these are the combined traditional and Roth IRA Contribution Limits:

Individuals under the age of 50 at the end of 2009: The maximum contribution that can be made to a traditional or Roth IRA is the lesser of $5,000 or the amount of your taxable compensation for 2009. This limit may be split between a traditional IRA and a Roth IRA, but the combined limit is $5,000. The maximum deductible contribution to a traditional IRA and the maximum contribution to a Roth IRA may be reduced depending on your modified adjusted gross income.

For individuals 50 years of age or older before 2010: The maximum contribution that may be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2009. This limit can be split between a traditional IRA and a Roth IRA but the combined limit is $6,000. The maximum deductible contribution to a traditional IRA and the maximum contribution to a Roth IRA may be reduced depending on your modified adjusted gross income (AGI).

[SOURCE: Internal Revenue Service website, www.irs.gov]

For more information on IRAs, click the following link to IRS Publication 590, Individual Retirement Arrangements.