If You Don't Have A 401(k) Plan, An Ira Makes A Nice Substitute

The Ticker

April 25, 1997|By Julius Westheimer

EVEN IF you do not have a 401(k) plan -- the tax-deferred retirement program most experts say is almost impossible to beat -- you can still build a hefty, tax-deferred nest egg for retirement.

And if you don't have a 401(k) with its menu of stocks and mutual funds -- wherein contributions are often matched by employers -- don't think you are alone. Working Woman magazine, May, says 40 percent of working men and women do not enjoy the 401(k) break.

But cheer up. One excellent substitute for a 401(k) is through an Individual Retirement Account (IRA). Today, some frequently asked questions and answers:

Who can open an IRA? Anyone age 70 or younger who earns money.

Why should I open an IRA? Since earnings from an IRA accumulate tax-free -- your IRA account pays no income or capital gains tax -- your returns can be much higher than that of most taxable investments. Also, for many people, the contribution is totally or partially deductible.

How much can I contribute to my IRA? A maximum of $2,000. A family with one working spouse and one nonworking spouse can contribute $4,000 total.

Can I deduct my IRA contribution from my taxes? If neither you nor your spouse is covered by an employer retirement plan, you may deduct your entire contribution. If either is covered, you may still qualify for a deduction, depending on your adjusted gross income.

When must I contribute to my IRA? You have until April 15 to fund your IRA for the preceding year.

How much money can I accumulate before retirement? That depends on your investment returns. Let's assume a $2,000 annual contribution at 10 percent: With 10 years to retirement, the fund grows to $31,874; 15 years, $63,544; 20 years, $114,550; 25 years, $196,694.

Another example: In an IRA, invest $2,000 a year from age 25 to 35 -- then stop, don't put another nickel in -- and at 12 percent your money will grow to $1.26 million by age 65.

How can I open my IRA? Most brokerage firms, mutual fund organizations, etc., offer many IRA vehicles and expertise needed to help you start your IRA.

Why should I open my IRA before the deadline? Because the earlier you open your IRA, the longer your tax-deferred income accumulates.

Should I open an IRA if it's nondeductible? I think it still makes sense to contribute. The earnings compound untaxed, a big plus, and an IRA encourages "forced saving."

Can parents and grandparents make IRA contributions for their children and grandchildren? Yes, if these recipients earned income during the year.

Pub Date: 4/25/97

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