Load Up Your Traditional IRA for Tax-Advantaged Savings
(or consider a Roth IRA for increased flexibility)

(Note: Because IRA contributions for the previous year can be made up until April 15, the eligibility and contribution limits discussed in this article are for tax-year 2007.)

With Tax Day fast approaching, now is the time to consider your last-minute options for sheltering some extra cash from taxes. Funding a traditional, tax-deductible IRA is one such method, with contributions for the 2007 tax year allowable until April 15.

In fact, in addition to your employer-sponsored retirement plan, a traditional IRA is one of the best ways to bolster your tax-advantaged retirement savings.

But depending on your specific needs, you might also consider a Roth IRA. The main differences between the two are when you pay the taxes on your contributions, and the flexibility of withdrawals.

Taxes & Withdrawals
With a traditional IRA, all withdrawals are taxed as income, because your contributions are tax-deductible. Withdrawals before age 59 ½ in cases of disability, death, for higher education expenses or for up to $10,000 for a first-time home purchase are penalty-free. However, unlike a Roth, if you withdraw from a traditional IRA for any other reason before age 59 ½, you face both taxes and penalties, with limited exceptions.

With a Roth IRA, you pay taxes in the present, using after-tax dollars. This enables you to make tax-free withdrawals of your contributions plus earnings at age 59 ½ (after you have had the account for five years). In addition, penalty-free and tax-free withdrawals of contributions and earnings are allowed in cases of disability, death or for up to $10,000 for a first-time home purchase (taxes on earnings only, if the account is less than five years old). Withdrawals for higher education expenses before age 59 ½ are penalty-free, but not tax-free (taxes on earnings only, not contributions, regardless of the age of the account). Finally, you can withdraw contributions (but not earnings) at any time with no penalty or taxes.

Which Approach Is Better?
Here’s the significant difference between the two approaches to when taxes are paid: If you stay in the same (or move to a higher) tax bracket when you retire, a Roth IRA will allow you to save more money than a traditional IRA. The reason is, you’re paying taxes on your IRA at a tax rate that is the same, or lower, than you will face in retirement.

However, if your retirement tax bracket is lower than your current tax bracket, a traditional IRA is the better choice. Why? Because you’ll be paying the taxes on your IRA at your lower, retirement tax bracket instead of the higher bracket you’re in today.

Unfortunately, there is no perfect way to determine whether your tax bracket will be higher, lower or the same in retirement. In the past, it was widely expected that a retired person’s taxable income would fall, dropping him or her into a lower tax bracket. Today, however, more and more retirees maintain the same level of income into retirement. Ask your banker for help in making this determination.

Eligibility
Another important factor that will help you determine which IRA might be better for you is eligibility. For each type, eligibility is determined by your modified adjusted gross income (MAGI).

If you are married and file a joint income tax return, your eligibility for a Roth IRA phases out if your MAGI is between $156,000 and $166,000. Eligibility for a traditional IRA phases out for joint filers with MAGI between $83,000 and $103,000.

Roth eligibility phases out for individuals with MAGI between $99,000 and $114,000. Traditional IRA eligibility phases out for individuals with MAGI between $52,000 and $62,000.

However, for a traditional IRA there is no income cap for married couples when neither spouse participates in an employer-sponsored retirement plan, nor for an individual not covered by such a plan. For couples where one spouse participates in a sponsored plan, eligibility for the uncovered spouse phases out between MAGI of $156,000 and $166,000.

Annual Contributions
Now that you have the information to decide whether a Roth or traditional IRA is the better choice for you, you can decide how much you want to contribute. As noted above, IRA contributions for the 2007 tax year can be made up until April 15, 2008.

For both Roth and traditional IRAs, the 2007 annual contribution limit is $4,000 for anyone who was under age 50 on December 31, 2007, and $5,000 for anyone 50 and older at year-end.

Note that eligibility limits and annual contribution limits will change again for the 2008 tax year, allowing even more money to be stashed in an IRA.

North Atlanta Bank offers both Roth and traditional IRAs. For more information, or to open an account, please contact one of our financial professionals.