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Chris Merchant
Christopher W Merchant is a C.P.A. with over 30 years experience in all aspects of tax preparation, accounting and business valuations. Chris is a member of The American Institute of Certified Public Accountants and the National Association of Certified Valuation Analysts. In addition to his private practice, he opened Liberty Tax Service with his sister Kelly Carpenter in January 2001. Liberty Tax Service is located in Towne West Square and offers high quality tax returns as well as refund anticipation loans in which clients can receive their refunds in 24 to 48 hours. For more information, you may contact Liberty Tax Service by phone at (316) 219-4829 or Chris at (316) 744-9181. Chris graduated from Wichita State University in 1970 and lives in Wichita with his wife Debra and children Andrew and Jamie.
Taxes & Accounting
2002-03-01 16:18:00
Which IRA makes sense?
Question: I am starting a retirement savings account this year and would like to know if I should put money into an IRA. If so how much can I put in and  is a Roth account better than a regular IRA?
Answer:  The Individual Retirement Account (IRA) benefits are bigger and better than in past years. For those investors who have fallen behind in providing for their retirement goals they can use these improvements to get started or catch up.  For those whose retirement plans are already underway these changes can help them get even further ahead.  Regardless of where you stand now, you should use the IRA to the fullest extent possible. Through the years, it remains one of the best investment vehicles around.  There are two basic types of IRAs, the Traditional and the Roth. Both allow money to grow tax-free until withdrawn (generally, after age 59 1/2). With either IRA, there is a 10 percent penalty, in addition to the tax liability, for withdrawing money before age 59 1/2, although the penalty can be avoided under some circumstances.For the tax year 2001 and before contributions to IRAs could not exceed $2,000 in any year. Under new laws, contributions are increased to a maximum $3,000 a year in 2002-2004. The limits are increased to $4,000 in 2005-2007 and $5,000 in 2008.  Furthermore, taxpayers age 50 and older will be able to make additional "catch-up" contributions to their IRAs beginning in tax year 2002. In years 2002-2005, they will be able to contribute another $500 annually. In year 2006, they will be able to contribute an additional $1,000 annually. Thus, for 2002, individuals age 50 or older or who will turn 50 during the calendar year may contribute a total of $3,500 to IRAs. Those younger than 50 may contribute up to $3,000.Traditional IRAs were designed to encourage taxpayers to increase their retirement savings by making deductible contributions to what is effectively a government-authorized savings account. The Traditional IRA allows the investor to deduct his contribution from his taxable income. This tax deduction is available to anyone who cannot participate in a company-sponsored retirement plan.  Those individual that can participate in a company provided retirement plan can take a partial deduction if their income is between $34,000-$44,000. For married couples the income limitation for a partial deduction is $54,000-$64,000.  Those over the income guidelines who can participate in a company retirement plan get no deduction. The Traditional IRA is fully taxable when withdrawn.The tax benefits of a Roth IRA are "back loaded" rather than "frontloaded" as with deductible IRAs. Contributions to Roth IRAs are nondeductible, but earnings build up tax-free and taxpayers can eventually withdraw funds, including earnings, tax free if the funds are withdrawn after age 591/2 and five years after opening the Roth account.Individuals earning less than $95,000 may fully participate in a Roth.  Individuals earning $95,000-$110,000 and couples earning $150,000-$160,000 may put in part of the full amount.  Those earning over those guidelines may not contribute.Now to answer your question, which is best? If you can't claim the full deduction for a traditional IRA then the Roth is usually best. In addition, if you expect to be in the same or higher tax bracket at retirement, then the Roth is best. If you expect to be taxed at a lower rate during retirement or if you can benefit from the deduction now, then the Traditional IRA is probably the best. 
 
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