The Search for IRA Alternatives With BC-IRA Farewell
NEW YORK (AP) _ Many people who are no longer eligible to make deductible contributions to individual retirement accounts are casting about these days for other ways to save for their later years.
Some still can use salary reduction programs, known as 401k plans, if their employers offer them.
The self-employed still have the option of contributing to Keogh plans, which were left largely intact by tax reform.
And the possibility remains for any upper-income saver who so desires to keep feeding his or her IRA kitty with nondeductible contributions of up to $2,000 a year.
Furthermore, just about any conventional investment can serve as a retirement savings vehicle, whether your taste runs to real estate, stocks or bank certificates of deposit.
But fresh memories of the IRA deduction naturally create a craving for something else that comes with a tax break. Some other types of investments that qualify on that score:
MUNICIPAL BONDS: These old standbys pay interest that is exempt from federal income taxes, in most cases. People making relatively small, periodic contributions can invest in them through specialized mutual funds or unit investment trusts.
Safety-conscious investors should pay attention to credit risk in municipals, as measured by ratings assigned to the bonds by firms such as Standard & Poor’s Corp. and Moody’s Investors Service. Some municipals are covered by private insurance against default, but none are guaranteed by the federal government, as Treasury securities are.
Like other bonds, municipals that are sold on the open market before they reach maturity fluctuate in value as interest rates rise and fall.
ANNUITIES AND LIFE INSURANCE PRODUCTS: Under the Tax Reform Act of 1986, money invested in annuities and life insurance policies can continue to compound tax free, just as it can in an IRA. In particular, interest has been running high lately in single-premium whole life insurance, which can offer several advantages in the new tax climate.
Deals such as this require close scrutiny on matters such as costs, promised yields, and early-redemption penalties. Annuity contributions and life insurance premiums are not, and have never been, tax deductible.
U.S. SAVINGS BONDS: These pay interest in the form of a gradual increase in value, which can be deferred from income taxation until the bonds are cashed in. If held for five years or more, Series EE bonds offer a guaranteed yield of at least 6 percent.
Safe, although a bit stodgy by reputation, savings bonds offer a good deal of flexibility for small savers. They can be bought for as little as $25, or you can invest as much as $15,000 a year.
GROWTH INVESTMENTS IN GENERAL: Tax reform does away with the once-generous favorable treatment for long-term capital gains on stocks, real estate and other investments that offer the hope of price appreciation. Dividends, rents or any other type of current income received from these investments are subject to tax, even if the money is reinvested. But otherwise, any increase in value is not taxed until you sell the investment in question.
End Adv Weekend Editions Adv 04-05