IRA Basics
By: Suzanne Lako
The Henssler Financial Group Position Paper

The Individual Retirement Account (IRA) is one of the most widely used types of retirement accounts. Two types of IRA accounts exist, the Traditional IRA and the Roth IRA. Here are the basics on each.

Traditional Individual Retirement Account (IRA)

A Traditional IRA is a retirement account in which contributions and earnings grow tax-deferred. Contributions may or may not be tax-deductible, depending on income and employer retirement plans. Distributions are taxable, although after-tax contributions are not taxed when distributed.

Contributions are limited to $5,000 in 2008. Those age 50 or older may make a "catch-up" contribution as well. The catch-up contribution is limited to $1,000 for 2008.

Contributions are tax-deductible for individuals or couples if no employer retirement plans are available. Otherwise for 2008, tax-deductibility is phased out for individuals with adjusted gross income (AGI) of $53,000 to $63,000, or for couples filing jointly with AGI of $85,000 to $105,000. If one spouse has an employer retirement plan, and the other does not, phaseout is between $156,000 and $166,000. Those not eligible to make tax-deductible contributions may still make after-tax contributions to an IRA account, regardless of income.

Distributions prior to age 59½ are subject to a 10% penalty tax (some exceptions apply) as well as ordinary income tax. Distributions after age 59½ are subject to ordinary income tax. Mandatory distributions must begin before April 1st of the year following the year in which the IRA holder turns 70½.

Roth Individual Retirement Account (IRA)

A Roth IRA is a retirement account in which contributions and earnings grow tax-free. Contributions are not tax-deductible, and are made with after-tax earned income. Distributions are tax-free provided the following requirements are met:

Contribution limits and catch-up contribution limits are the same as the Traditional IRA for 2008.

For 2008, eligibility for Roth contributions is limited to individuals with AGI of less than $101,000, or for couples filing jointly with AGI of less than $159,000. Partial Roth contributions are available to those in the AGI phase out ranges (for individuals $101,000 to $116,000, for couples filing jointly $159,000 to $169,000).

Roth IRAs are not subject to mandatory distribution rules and contributions can continue regardless of age. This benefits the investor with sources of income other than an IRA and can make the Roth IRA an estate-planning tool as well.

Our Advice

The Henssler Financial Group recommends making a Roth IRA contribution if you are eligible. If you are not eligible, in most cases, you are probably better off avoiding a Traditional IRA contribution with after-tax dollars, with a few exceptions. If you are a frequent trader, the Traditional IRA allows you to realize capital gains without paying capital gains taxes at the time you sell. Also, if you have most of your assets in taxable accounts, a small portion added to an IRA gives you some diversity, just in case tax law changes in the future make the Traditional IRA more attractive. Otherwise, under current tax law, you are probably better off investing funds in a taxable account. Of course, as tax laws change, so will these recommendations. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.