Supplementing Your Retirement Income With IRAs

Many Americans to some extent depend on Social Security to finance their retirement years and to provide their beneficiaries with financial support; however, according to projections made by the Trustees of the Social Security Fund, the fund assets will begin to be depleted by 2027 and are projected to be exhausted in 2041. While some of us depend on employer-sponsored retirement plans to supplement our retirement income, you are, as an individual, able to supplement your retirement nest egg by funding personal retirement plans such as Individual Retirement Accounts (IRAs). Let's look at some of the features and benefits of IRAs.

Traditional IRAs
A Traditional IRA may be funded by an individual who receives taxable compensation during the year and is under the age of 70.5. If you are married and not currently employed, your spouse may fund your Traditional IRA on your behalf, providing you file a joint income-tax return. You may be able to take a deduction on your income tax return for contributions made to your Traditional IRA if you meet certain requirements. The ability to deduct your contribution is usually dependent on your tax-filing status (i.e. 'married', 'single' or 'married filing separately'), your income and whether or not you participate in an employer-sponsored retirement plan, such as a 401(k) plan. (For information on the deductibility of IRA contributions, see Are You an Active Participant? and Traditional IRA Deductibility Limits.)

In addition to funding your Traditional IRA with annual contributions, you may also fund it with assets from your employer-sponsored retirement plan, such as qualified plans, 403(b), 457(b) plans, SEP and SIMPLE IRA plans. Generally, you are allowed to distribute assets from qualified plans, 403(b) and 457(b) plans only if you experience a triggering event. Also, if you inherit retirement assets from your deceased spouse, you may be able to rollover these into your Traditional IRA.

To be sure, consult your employer or plan administrator to determine what the triggering events are for the plan in which you have assets. Your plan administrator should also be able to tell you if the assets are eligible to be rolled over to your Traditional IRA.

Roth IRAs
The Roth IRA - sometimes referred to as the back-ended IRA because the tax benefits are not received up front like they sometimes are with a Traditional IRA - is similar to a Traditional IRA in many respects. There are, however, also marked differences. Some of these are the following:

You are able to fund your Roth IRA even after attaining the age of 70.5.
You are not required to start distributing assets when you reach age 70.5. (For Traditional IRAs, when you reach the age of 70.5, you must start taking required minimum distributions from the account.)
You cannot take a deduction on your income-tax return for contributions made to your Roth IRA.
You can make annual contributions to your Roth IRA only if your modified adjusted gross income is less than a certain amount:
- $169,000 if you are married and file a joint income-tax return.
- $10,000 if you are married and file separate income-tax returns and you have lived with your spouse at any time during the year.
- $116,000 if you are filing your status as single, you are the head of a household, or a qualifying widow or widower or you are married, and filing separate income tax returns and you did not live with your spouse at any time during the year.

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