IRAs in your 40s, 50s, 60s, and 70s

Your 50s may be your peak earning years and, therefore, a great time to maximize your retirement savings and investments. If you switch jobs, start a new career, or launch an early retirement, you may have a lump-sum distribution from a retirement plan to roll into an IRA. Should you be the victim of downsizing or unexpected health problems, you may need to tap into your retirement savings sooner than expected. Under the new rules that passed with the Roth IRA, you can also fund a college education or help a child buy a first home! Here are some rules for the road in your 50s.

Contributions

Try to invest the maximum $2,000 every year. (Some rules changed in 1997. Now, a couple with one non-working spouse can invest double the maximum for a single individual, i.e. $4,000.)

Deductions

If you have a traditional IRA, you can deduct your contribution under the following circumstances:

1. if neither you nor your working spouse are covered by an employer-sponsored retirement plan.
   

2. if both of you are covered by an employer-sponsored retirement plan, but your joint adjusted gross income is $40,000 or less ($25,000 for individuals).
   

3. if your spouse is covered by an employer-sponsored retirement plan, but you aren't, and your combined adjusted gross income is under $150,000.

If you don't meet any of the above income limits, you may still contribute to a traditional IRA, but you may not deduct your contribution. If you choose a Roth IRA, you may not deduct the contributions from your taxes.

Early Withdrawal

The penalties for early withdrawal of IRA funds (i.e., before you are 59 1/2) are intended to discourage people from tapping into retirement savings too early. But the law also makes exceptions for life's hardships, and as of 1998, some of the potential financial burdens of parenthood, like funding a college education or helping a child buy a home. With a traditional IRA, you will still have to pay income taxes on the money you withdraw early; with a Roth, you may incur some taxes on the earnings, but only if you withdraw more than your total contributions. But with both forms of the IRA, you'll avoid the additional 100enalty for withdrawal of the money before you reach 59 1/2 under these circumstances:

1. you use the funds toward the purchase of a home for yourself or any member of your family. This withdrawal is limited to $10,000.
   

2. you use the funds to pay for certain qualified college expenses.

3. you use the funds to pay medical expenses in excess of 7.5 percent of your adjusted gross income.

4. you have become disabled.

5. you have become unemployed and use the money to purchase health insurance.

6. you elect to receive equal periodic payments based on your life expectancy.

IRA Transfers and Rollovers

If you're leaving your job for any reason and have a retirement plan with your employer, you may want to transfer those funds to an IRA. That way, your retirement money can continue to grow tax-deferred. If you want to put the money in a Roth, you can first roll into a traditional IRA and then into a Roth. You will have to pay federal income tax on the funds you roll from the traditional IRA to the Roth, but if you authorize the transfer in 1998, you can take the next four years to pay the taxes. But to qualify for this conversion, your adjusted gross income, whether married or single, must be under $100,000.

Tell your employer in writing that you want your lump-sum distribution transferred directly to an IRA. If you think you may take a future job that has a retirement plan, put the lump sum into a rollover IRA that's separate from your personal IRA, so you can roll it back into a new plan when the time comes. Whatever you do, avoid the headaches that ensue if you take possession of the money yourself.

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