Fear and uncertainty over once-admired IRAs

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By: JIM VANDER SPEK - For the North County Times on April 9, 2003

The thrill is gone. It was only a few years ago that everyone was excited about their IRAs and sought out the hottest mutual fund to invest in. Now, it seems that most people cringe when looking at their latest quarterly statements and wonder if investing in IRAs is still smart.

The latest studies bear this out, showing that the lack of enthusiasm is translating into less money going into deferred retirement accounts of all types. The unfortunate reality is that the lousy performance that we are expecting from the market should drive us to put more away, not less. Remember, only positive performance and new contributions add to the kitty. You may even by chance be buying stocks when they are cheap.

A little late to the party, our government has radically increased the maximum amounts that can be invested in IRAs, 401(k)s and other plans starting in 2002. For example, the limit for a standard IRA, whether a Roth or conventional, has been increased from $2,000 to $3,000. If you are older than 50, the increase goes all the way to $3,500. You can make an IRA contribution right up to April 15 and still deduct it for 2002. Invest now and amend your returns if necessary to receive a refund.

Many people are confused by the many options. One constant question I get is whether one should choose a Roth over a conventional IRA. I love Roths but believe that you should view them as supplemental retirement plans instead of core plans. For example, if down the road you are assured a large retirement income from whatever source it may come, a conventional IRA may be a problem, since it will add to your income.On the other hand, if you are scrambling to save for your retirement and don't foresee a sizable income in your retirement years, you should go for the regular IRA and snag a deduction right now. The money you draw from your IRA in your retirement years will not be taxed heavily unless you have sizable other income at that time, whereas the taxes you save now can be substantial.

A Roth IRA works great if you participate in a plan already and have money left to put away. Unless your income is too high (about $150,000 for married couples), you are eligible to invest in a Roth over and above other plans. In a Roth IRA, your investment can grow tax-free, indefinitely. Also, if you are having a bad year with low income, consider converting your conventional IRA funds into Roth accounts. The resulting taxable income could escape taxes.

Little understood by those whose income is too high to invest in a Roth is that they could still be eligible to invest in an odd duck called a "non-deductible IRA." This vehicle works like a mini annuity. You put the money in without a deduction, but it will grow tax-free until you retire.

Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com