Understanding the Basics of IRAs

John and Mary Smith are planning for retirement. Because Social Security will provide only part of their retirement income, both have contributed the maximum to their 401(k) plans through work.

The Smiths also want a personal savings tool to supplement their retirement funds and provide tax-deferred growth so their savings can accumulate faster. They know that Individual Retirement Accounts (IRAs) fit the bill. What they don't know is which IRA is right for them, a traditional or a Roth IRA.

Below are some differences between the two:

Traditional IRAs

• Traditional IRAs are available to anyone with earned income under the age of 701/2.

• Earnings from contributions are tax-deferred until you withdraw the money.

• IRA contributions may be tax-deductible depending on your marital status, income, and participation in an employer-sponsored plan.

• There is a mandatory distribution of funds from a traditional IRA once you become age 701/2.

Roth IRAs

• Individuals can contribute to Roth IRAs at any age so long as they have earned income and meet income limits.

• While contributions to a Roth IRA are not deductible, withdrawals are tax-free so long as you hold the IRA for five years and are at least age 591/2 when you begin withdrawing (other criteria can apply).

• There are no requirements for when the Roth IRA owner must begin withdrawing funds. However, after the owner's death, distribution requirements apply to the beneficiary.

With either IRA, the maximum annual contribution for 2003 or 2004 is $3,000. However, if you're age 50 or greater by the end of the year, you can contribute an extra $500, for a total of $3,500 (not to exceed 100 percent of your earned income). An IRA contribution can be made on or before that year's tax-filing date (excluding extensions). For example, you can make an IRA contribution for the 2003 tax year on or before April 15, 2004. With either a traditional or Roth IRA, a 10 percent early-withdrawal penalty may apply to taxable withdrawals taken prior to age 591/2, except in certain circumstances.

After careful review, the Smiths chose an IRA and opened it through their personal financial services provider. This option offers the Smiths flexibility with a wide range of investment options, including stocks, bonds, annuities and mutual funds. Additionally, automatic transfers from their bank account to their IRA account makes saving even easier.

To learn more, log on to www.allstate.com.

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