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IRA Basics

An Individual Retirement Account (IRA) enables workers with earned income (salary from a job or net earnings from self-employment) to save and invest for retirement. IRAs are not an investment, per se, but, rather, a special classification for tax purposes. The actual investment can be in stocks, bonds, certificates of deposit, or mutual funds. Arrangements to open an IRA account can be made with a stockbroker, bank, or mutual fund company.

In the early 1980s, federal legislation created a tax-deductible IRA for anyone with earned income. Significant changes in 1986 established income limits for participants in an employer-sponsored retirement plan that eliminated tax deductibility of IRA contributions for many people. The Roth IRA became available January 1, 1998. While not deductible, it offers federal income-tax-free growth.

Federal tax law limits 2003 and 2004 contributions to either a traditional or Roth IRA to $3,000 for a worker with earned income. An additional $3,000 can also be saved for a worker's spouse, regardless of whether or not the spouse is employed. In addition, workers or spouses who are age 50 or older can contribute an additional $500 ($3,500 total).

Minimum deposits required to set up an IRA vary with the financial institution and type of investment. For example, a bank may require $500 to purchase a CD for an IRA and a mutual fund may require a $1,000 minimum deposit.

There are a number of income limits with respect to IRAs:

• Roth IRAs are fully available to joint filers whose current adjusted gross income (AGI) is less than $150,000. There is a phase-out range between $150,000 and $160,000. You cannot contribute to a Roth IRA if your AGI is more than $160,000.


• Roth IRAs are fully available to single filers whose AGI is less than $95,000. No participation is allowed if your AGI is more than $110,000. The phase-out range is between $95,000 and $110,000.


• A working spouse who is not covered by an employer-sponsored plan may have a fully deductible Traditional IRA, even if the spouse is in an employer-sponsored plan, if the household AGI is less than $150,000. The phase-out range is from $150,000 to $160,000.


• People with earned income who are not in an employer-sponsored retirement plan, regardless of income level, may qualify for a tax deductible Traditional IRA. In other words, their contribution is made with before-tax dollars. Another group of taxpayers who can deduct their Traditional IRA contribution are those with an employer-sponsored plan that file jointly with an AGI in 2003 under $70,000. (This amount will be gradually increasing each year, reaching $80,000 in 2005. In 2004, it will be $75,000).


• The maximum annual AGI for a Traditional IRA, under which single filers can qualify for a tax deduction, is $50,000 in 2003. This amount is gradually increasing and will be $55,000 in 2004 and $60,000 in 2005.