TOP DRAWER ARTICLE

Plans for Tomorrow
by
HL Carpenter

Even if Alan Greenspan is one of the few people in Washington with the courage to say it aloud, there will be changes to the Social Security system some day. That’s not necessarily a bad thing, but it does mean you ought to be thinking about how you’ll finance your retirement.

Here’s a general overview of two plans you can use to save for your future:

Traditional Individual Retirement Arrangement (IRA) – For the 2003 tax year, you can contribute the lesser of $3,000 or your compensation to an IRA. If you’re over age 50, you can also make additional ‘catch-up’ contributions. The contributions may be tax deductible above the line. (That’s tax language for ‘you might get to subtract it from your income before turning the tax form over to page two’.)

If you don’t qualify for deductible contributions, you may be able to set aside money in a non-deductible IRA. The idea is similar to a deductible account. But instead of reducing your current taxable income, contributions establish ‘basis’. When you start taking money out of the IRA, the ‘basis’ lowers the amount subject to tax.

With either IRA, account earnings are not subject to tax until you make withdrawals, which are permitted after age 59-1/2. Generally there are penalties for taking money from your IRA early.

Roth IRA – With a Roth IRA, contributions aren’t deductible going in, and you’re generally not taxed when the money comes out. (One caution: earnings may be taxed - and subject to penalties - if you withdraw them early without meeting certain requirements.)

Like a traditional IRA, you can invest your money in a variety of ways, including stocks, bonds, gold, or real estate.

You still have a few weeks to decide which type of IRA makes sense for you and to make a contribution. So why not get started? The sooner you establish your nest egg, the more secure your retirement will be, no matter what happens to Social Security.

Originally published March 2004.

Last update: January 8, 2011