Individual retirement accounts, universally known as IRAs, entered the world of retirement saving with the enactment of the Employee Retirement Income Security Act of 1974. The concept of an IRA was to permit people to save on their own for retirement, rather than relying solely on employer-sponsored retirement plans. The initial contribution and deduction limit was $2,000, if the individual had at least that amount of earned income. Over time, that limit has risen to $5,500. If the individual is age 50 or older, an additional catch-up contribution of $1,000 may be made each year. The ability to make tax-deductible contributions phases out at specified income levels if the individual is also participating in a qualified retirement plan.

Contribution limits apply to Roth IRAs (there is no tax deduction for Roth IRA contributions). The ability to make a Roth contribution also phases out at specified income levels. Roth IRAs are a more recent innovation, offering an exemption from federal income tax for distributions if requirements are satisfied. You see and read many discussions of the relative merits of traditional and Roth IRAs, and the wisdom of converting traditional IRAs to Roth, which is a subject for another article. As with all other aspects of retirement income planning, the choice is dependent on individual and family circumstances. Advice that, for example, it is always best to convert to a Roth IRA is wrong.

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