Chris HopkinsResponding to a series of high-profile pension collapses, Congress in 1974 enacted the ERISA act to provide some safeguards for retirees. One important component was the creation of the IRA account, encouraging workers to set aside additional retirement funds on their own. Contributions were limited to $1,500 per year and only permissible for those not covered at work.
Since then, the rules have changed more often than costumes at a Lady Gaga concert.
Today, IRA accounts come in two flavors: traditional and Roth. The main difference lies in the tax treatment of contributions and withdrawals. Generally speaking, traditional IRAs consist overwhelmingly of pre-tax contributions which grow tax-deferred and are taxed as income at the time of withdrawal. Roth accounts, introduced in 1997, are funded with after-tax money but incur no taxes at distribution.
The traditional IRA account is the workhorse of personal retirement investment, holding over $4 trillion in assets. In addition to providing a vehicle for individual contributions, this type of account also serves as the vessel into which assets of company retirement plans are rolled upon termination of employment. Yet surprisingly few people contribute additional funds; according to the Employee Benefit Research Institute, only 6 percent of holders added to their accounts in 2013.
For 2014, anyone with earned income may contribute up to $5,500, and workers over 50 may salt away $6,500. These contributions are fully tax deductible if neither you nor your spouse has access to a company retirement plan. If your spouse’s employer has a plan but you do not, your deduction phases out above a joint income of $181,000. This should be your first stop if your company provides no options.