IRAs: NEW WAY FOR PEOPLE TO SAVE

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

The Taxpayer Relief Act of 1997 expanded rules on traditional IRAs and created the new Roth IRA. Both options offer different advantages, but each should allow individuals to boost their savings and provide for a more comfortable retirement.

Expanded traditional IRAs

If you are under age 70 1/2 and have earned income, you can contribute up to $2,000 to a traditional IRA. However, rules for existing IRAs have been expanded to allow more people to make deductible contributions, even if you participate in an employer-sponsored retirement plan. If your spouse is covered by a retirement plan at work, but you aren't, you can make a fully deductible IRA contribution until your combined adjusted gross income (AGI) reaches $150,000.

The legislation also has made it easier to access funds for certain lifetime events. Penalty-free withdrawals are available for distributions made to cover qualified higher education expenses or up to $10,000 for first-time home-purchase expenses.

The Roth IRA

The Roth IRA will not give you an upfront deduction, but it will allow you to accumulate all earnings tax free. Unlike traditional IRAs, contributions to a Roth IRA can be made after age 70 1/2. If you have earned income, you can contribute up to $2,000 per year (reduced by the amount contributed to a traditional IRA) if you're a single taxpayer with an AGI of less than $95,000, or less than $150,000 if you're filing jointly. Under certain circumstances, you can take tax-free, penalty-free distributions for first-time home-purchase expenses and penalty-free distributions for college expenses.

If you're eligible for either a tax-deductible IRA or a Roth IRA, which is right for you? If you're saving for a first-time home purchase or retirement, and these events are at least five years away, the Roth IRA not only allows penalty-free withdrawals, but distributions are tax free. And you can convert your traditional IRA to a Roth IRA if your AGI is $100,000 or less. However, in some cases, the newly expanded traditional IRAs may still offer more advantages. Your investment professional can help you determine which IRA option best suits your savings objectives.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.