This is an article I wrote for a newspaper which helps explain why newspapers are in trouble--you have to dumb things down a bunch. But maybe somebody will find it a help. A small help but maybe a help.
I’m usually not a big fan of the New York Times but they had a pretty good article by Alex Tarquino about the often-overlooked IRA.
First, what is it? IRA stands for Individual Retirement Account, which most people know but most people don’t use. Ninety percent of annual IRA money is money, including mine, rolled over from 401k and 403b accounts when people leave their jobs. Nothing wrong with that but here is what is wrong—only fourteen percent of people eligible to contribute to IRAs do so.
Why? First of all, basic laziness. Wealth building requires action and most people are financial couch potatoes. Cumbersome paperwork, risk of loss, tying up money for twenty plus years and a deep seated distrust of financial institutions make us all wary and willing to put it off to tomorrow, or the day after that, and so on.
If that wasn’t bad enough, throw in the Congress and the Internal Revenue Service that have made the rules complex, if not totally incomprehensible. If you want to check out the rules, go to the web page of the Investment Company Institute. But be warned—the rules for IRA’s cover 108 pages. Too much for me.
So let’s make things a bit less complex. First, if you have a 401k or 403b, you can probably forget about an IRA. At least, until you quit. You want to max out your company’s retirement plan because they will usually do a match—you contribute and they contribute. An IRA is your money only.
But if you don’t have a company retirement plan, check out an IRA. There are two kinds—traditional and Roth. Here things are a bit simpler. A traditional IRA reduces your taxable income by the amount of the contribution. A Roth IRA contribution is made with after tax money but the earnings accumulate tax-free. My general rule is that if you are young and just getting started, go with the Roth.
Another simple rule—if you are single and do not have a retirement plan at work you can contribute the max to a traditional IRA regardless of your income level. The max this year is $5,000. $6,000 if you are over 60.
Here’s where Congress made things a lot more complex. If you are single but ELIGIBLE for a retirement plan at work you can still max out an IRA but only if you make less than $53,000. If you make over $63,000, you cannot contribute anything. If you are married, both work and both are eligible for a company retirement plan; you qualify for an IRA only if you have an adjusted gross income less than $85,000.
A Roth IRA is less complex as you can be eligible for a company retirement plan and still contribute but you have to make less than $101,000.
Why all the complexity? Congress. They wanted to stop those rich people from moving their money around tax-free.
Got a headache? I sure do but one final statistic and then a plan for taking the complexity out of retirement planning.
Here is the final statistic. Don’t feel too bad if you haven’t done the IRA because most people don’t even maximize their 401k plan. The important statistic is this—while 75% of employees eligible for a 401k do participate, only ten percent contribute the maximum.
So you have a lot of company if you don’t have an IRA or max out your 401k. But that is no reason to feel good. In this day and age, the traditional pension is pretty well shot so you are the only one responsible for your retirement and that means you have to get on it.
How? Make somebody else do the work. Go to your Human Resources department and make them fill in the paperwork. They will do it. That is their job.
If you want to contribute to an IRA and don’t know the rules, go to the people that do. Those people are bankers and mutual funds companies. I try not to name names but removing any obstacle to wealth is worth it so I recommend Fidelity Investments and Vanguard for making things easier, if not easy. Call them up and ask them do the paperwork and they will.