What Should I Know About IRAs

10/15/98 BOZEMAN - - Individual Retirement Accounts (IRAs) are a hot topic these days--especially since new laws provided for education IRAs, Roth IRAs and spousal IRAs, as well as changes to the laws governing existing IRAs.

Two new MontGuides from the MSU Extension service can help consumers sort through some of the details: "Individual Retirement Accounts (IRAs)" and "Withdrawals from Individual Retirement Accounts" are both available free of charge.

"Ordinary" IRAs. Since 1974, the U.S. government has provided tax savings to people who save money for retirement. Those people who pass eligibility and income requirements are able to set aside retirement money, which is deducted from their gross income when computing state and federal income taxes. In addition, interest earnings that accumulate from that IRA money are also tax-deferred. The money is typically withdrawn during retirement, when a persons's income is often reduced, thus putting him or her into a lower tax bracket.

The MontGuide contains a useful chart comparing the accumulated earnings of a person who began an IRA at age 22, another who began at age 40, and another who started making contributions, stopped and started again later. With an IRA earning 8% annually, the 22-year-old earned $683,011 for retirement by contributing $88,000 in monthly installments over the course of his working years.

Roth IRAs. Roth IRAs differ from traditional IRAs in that contributions are taxed initially, but future withdrawals and earnings are not. Again, certain eligibility requirements apply. "Ordinary" IRAs can be converted to Roth IRAs during 1998, but the person must pay taxes on the contributions at the time of the rollover.

So which is better--the Roth or the "ordinary" IRA? It depends on many factors, such as how many years until you begin withdrawing money, how long after your reitrement you expect to withdraw money, what is the rate of return, and what income tax brackets you are in now and expect to be in at retirement. The MontGuide has tables and examples to show the various outcomes and help you make a decision.

Education IRAs. The "Individual Retirement Accounts" MontGuide gives details on education IRAs, in which a taxpayer may set aside income for qualified higher education expenses of a named beneficiary. Though contributions to an education IRA are not tax-decuctible, accumulated interest earnings may be withdrawn tax-free when used for higher education expenses. The fact sheet lists many of the restrictions and requirements.

Withdrawals from IRAs. Even though money placed into an IRA is intended for retirement, sometimes a person needs the money sooner. Many rules govern when and in what amounts those funds can be withdrawn. The "Withdrawals from IRAs" MontGuide explains some of the penalties, exemptions and age requirements for withdrawing funds from an IRA. Also, when a person turns 70 1/2, withdrawals from an "ordinary" IRA must begin. Again, several regulations govern the payments and timing of payments.

To receive a free copy of "Individual Retirement Accounts" (MT 9807) and/or "Withdrawals from Individual Retirement Accounts" (MT 9808), visit your county MSU Extension office or send $1 for handling to: MSU Extension Publications, PO Box 172040, MSU, Bozeman, MT 59717-2040. These publications are also available on-line at http://www.montana.edu/wwwpb/pubs/coned.html

Send questions or comments to Goetting and Carol Flaherty, MSU Communications Services, Bozeman, MT 59717 or email them at carolf@montana.edu.

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