Jim Miller, 54, knows a good deal when he comes across one. When he finds a way to stockpile money for his kids’ education and not pay any taxes on his investment gains, he jumps to it. When he hears of a way to save for retirement and at the same time earn a nice little tax break on his promotional products business, he’s there.
In each case, Miller’s answer boils down to three simple letters: IRA. As Uncle Sam’s way of coaxing you to save for your golden years, IRAs have always had pretty straightforward rules. You got to stow away funds now allowing your savings to grow tax-deferred while earning a healthy deduction off your taxable income–up to $2,000 for single filers and $4,000 if you’re married. The only catch, though, was that you couldn’t touch the money until age 59 1/2; otherwise, you’d be taxed and penalized on any early withdrawal.
Now the entire ballgame has changed. As a result of last year’s Taxpayer Relief Bill, there’s a new array of IRAs out there, each with a different twist. Miller, for instance, has a son working his way through high school. With college tuition a major financial issue on the horizon, Miller’s giving the new Education IRA the once-over, especially since it’s a tax-free way to save for college. And Miller is also mulling over the new Roth IRA, an account that even allows you to tap your savings in case of an emergency with no penalty assessed.
What does it all mean for you? For one, if you haven’t yet opened an IRA, there’s no better time than now, especially since your contributions between now and April 15 can still qualify you for deductions on your 1997 income tax return (depending on your income). Even more important is the benefit of tax-free saving. Suppose, for example, you contributed Suppose, for example, you contributed $2,000 per year to an IRA for 25 years and earned an average 10% on your money annually. “Your $50,000 in contributions would grow to over $200,000,” says Richard Peace, a financial planner with Advantage Capital in Colorado Springs, Colorado. By comparison, if you invested the same amount at the same rate in a taxable investment, you’d wind up with only $77,000 after 20 years.
If you aren’t sold by now, consider this: most mutual funds allow you a sizable break on the minimum initial investment they require when you invest IRA money. To get into most mutual funds, you need $1,000-$2,000; but to start off with an IRA account, that sum shrinks to $100-$200. So, if you’ve been putting off mutual fund investing because of the steep initial outlay, an IRA is a great way to get started with a lot less. .
A NEW FINANCIAL LANDSCAPE
No matter what your reason for opening an IRA, you’ll find you have quite a choice these days. There’s the traditional IRA, and the new Roth and Education IRAs. There’s also the SEP-IRA and SIMPLE-IRA-two great ways to stockpile funds