How to Pick the Right IRA

IRAs are always in season. Have you gotten yours? Are you procrastinating? Or are you nervous about interest rates, Iraq, and the economy? What to do? There are a lot of misconceptions about IRAs and if you are even a little confused, read on.

You (or your spouse) must have earned income to contribute to an IRA.

If your income was only from dividends, interest, pensions, or rental property you cannot make an IRA contribution. Alimony is considered earned income and qualifies you for an IRA. Each spouse must have a separate IRA account.

If your earned income is from wages, you may contribute to either a regular or a Roth IRA.

The deadline for 2008 contributions to these types of IRAs is April 15, 2009. The limit on contributions is the lower of your earned income or $5,000 per person. If you turned 50 in 2008 you can contribute an extra $1,000. You may contribute to both a regular and a Roth IRA as long as the combined total does not exceed your limit.

A regular IRA is usually tax-deductible and all subsequent distributions are taxable. It may not be deductible if your income exceeds certain limits and you are covered by a retirement plan where you work. A Roth IRA is never tax-deductible, but all subsequent distributions may be tax-free provided that you keep the money in at least 5 years and are 59-1/2 years old or disabled when you take it out.

If your earned income is from self-employment, you may contribute to a SEP and a regular or Roth IRA.

If you file an extension, the due date for your SEP contributions is also extended - to October 15, 2009. We recommend that you take advantage of this extra time so you can see what kind of year you are having in 2009 before you decide your contribution. If 2009 is going great, you would want to contribute the maximum. If 2009 is a slow year, you could back off to save the cash. Your regular or Roth IRA contribution is still due April 15, even if you file an extension.

An IRA doesn't have to be in a bank.

Most banks would like you to think that IRA means bank account. If fact, you can also put IRA money in mutual funds, insurance contracts, stocks and bonds, real estate, and certain coins minted from precious metals. Collectibles like antiques and stamps are not permitted. In this age of low interest rates and stock market jitters, it's worth the time to research these alternatives. We recently located a company specializing in real estate IRAs that helped a client acquire 2 1/2 acres of raw land in the Antelope Valley of Southern California.

With all these choices, what are you supposed to do? To make the best decision for yourself, you have to consider your entire financial situation. Are you in a high or low tax bracket for 2008? Are you nearing retirement age or are you relatively young? What is your risk tolerance? There is no single strategy that is right for everybody, and the strategy that is right for you may be completely unique.

If your 2008 income was high, you should aggressively pursue the tax-deductible options such as SEP and regular IRA. The tax savings could be 40% or more. A 40% tax savings means that $1000 into your IRA only costs $600. That's like getting a $400 return on a $600 investment — a 67% return. So what if the bank is only paying 3%? You've gotten a total return of 70% the first year!

If your 2008 income was low, your motivation to invest in an IRA should be lower. If there is little or no tax benefit, choose a Roth IRA or no IRA at all.

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