Put more pay away

Spring is here, tax forms are probably piled up on your desk, and - if you have not yet thought about it - it's time to consider funding an Individual Retirement Account.

Yes, a good, old-fashioned, tax-sheltering, "save-what-you-can" IRA. This year, as in 1999, you can choose between a traditional IRA, which lets you take a tax deduction on the actual contribution, or a Roth IRA, which shelters your earnings, but does not grant you an immediate tax write-off on your contribution.

Either way, you will likely come out ahead, says IRA expert and accountant Ed Slott, editor of "Ed Slott's IRA Advisor," a newsletter.

And thousands of investors are jumping on the IRA bandwagon.

"We're getting plenty of calls now about establishing an IRA, and many of them this year are about setting up a Roth IRA or converting a traditional IRA to a Roth," says a spokeswoman for the Pax World mutual-fund group. At Pax World, an IRA can be set up for as little as $250.

For federal tax purposes, to make an IRA contribution for tax-year 1999, you must open your account and make your dollar contribution by April 17, 2000, which corresponds with the tax-filing deadline. (April 15, the normal deadline for filing federal taxes, falls on a weekend this year. Note also that some IRA providers may require an earlier date to set up the account, to meet their particular paperwork requirements.)

According to the Investment Company Institute (ICI), the Washington-based trade group for the mutual-fund industry, 34.7 million households, or roughly 1-in-3 US households, holds an IRA of one type or other. The number of IRA homes continues to grow, up 13 percent between June 1998 and June 1999.

Many more people could open IRAs, Mr. Slott says, but they mistakenly believe that they can't because their income levels are too high, or they have "maxed out" their company contributory-retirement plan, such as a 401(k).

Because of the two main types of IRAs offered people - the traditional IRA and Roth IRA - there is almost always a way to shelter assets beyond a company retirement plan, he adds.

With a traditional IRA, you can contribute up to $2,000, or 100 percent of your earned income, if less than $2,000. If married and filing jointly, you and your spouse may contribute up to $4,000. But each spouse can contribute no more than $2,000.

You will also need to know whether your contribution is tax-deductible, partly tax-deductible, or not deductible. Most plan providers offer detailed charts on income levels required to qualify for a deduction.

Generally, if you contribute to a retirement plan at work, you cannot take a full deduction. But this year, thanks to some fine tuning in Washington, some individuals covered under a retirement plan may be able to qualify for deductions, subject to certain limitations on their adjusted gross income, notes Bruce Wertheim, senior manager with tax firm KPMG.

Wells Fargo bank offers an excellent chart on income limitations for contributions on its Web site (www.wellsfargo.com). Click on the tab marked "retirement planning."

Folks who cannot take a full deduction may opt for a Roth IRA. With a Roth, you can still contribute up to $2,000 a year, or $4,000 for married couples. If the assets are held for at least five years and you do not take any withdrawals before age 59 1/2, your earnings can be withdrawn entirely tax-free.

Unlike the traditional IRA, you can also contribute to a Roth past age 70 1/2, which is when you must start taking distributions from your regular IRA account.

Slott argues that an individual who leaves one employer for another should consider shifting a 401(k) to an IRA, both to qualify for a broader range of investment options, and to extend the required distribution period (using a beneficiary) beyond his or her own lifetime. This move can substantially lower the tax bill when it's time to receive distributions.

Slott also recommends that investors, in general, should shift from traditional IRAs to Roths, if possible. Those who convert will have to pay the taxes now. But they could come out well ahead over time.

A final point: When setting up an IRA, seek the highest-possible earnings gains consistent with safety (such as using some growth or growth-and-income mutual funds). But also beware of high expense fees, or unusual "annual" charges. Shop around among IRA providers, experts say. If the IRA provider and product prove to be bad choices, you can always make a direct transfer or rollover at a future time to another provider.

(c) Copyright 2000. The Christian Science Publishing Society