
Would you like to save enough money to retire comfortably? And
wouldn't it be nice if your savings could grow faster than
inflation, and without all your earnings being sapped by taxes?

Well with an IRA, you can get a good return on your money and
avoid paying any taxes on it until you retire.  Why is that
important?  Because every year that you DON'T have to pay taxes
on your earnings, they go back in toward the next year's growth.
Over a lifetime, that really adds up.  It is said that Albert
Einstein once jokingly remarked that compound interest was the
greatest discovery ever made.  IRA Investor will show you how
compound interest can be YOUR greatest discovery.

^1*  What IS an IRA?

The IRA or "Individual Retirement Account" is a special type of
savings account that comes with special tax advantages.  These
tax advantages are two-fold.  First,  you may be able to deduct
the money contributed to an IRA from your income tax.  Second,
the interest your savings earn is TAX EXEMPT until withdrawn!

Prior to 1982, IRAs were available only to people who were not
covered by any retirement plan.  But under the Economic Recovery
and Tax act of 1981, anyone under the age of 70 1/2 can
contribute 100% of earned income up to $2,000, deduct that
amount from taxable income(usually), and let the amount compound
tax deferred.  The Tax Reform Act of 1986 made new changes to
the IRA rules, but left intact the greatest advantage of the
IRAÄÄtax-defferred growth.

Tax-defferred growth lets you save your money for the future
without paying income tax on it until it is withdrawn.  The
results can be staggering.

In effect, paying taxes on the interest earned each year is like
earning a lower interest rate.  When those funds are plowed back
into your savings, rather than being siphoned off to pay Uncle
Sam, your nest egg grows much more rapidly!  Of course, you will
have to pay taxes on your interest when you withdraw it, but
that is the whole point--IRA Investor is designed to show you
that these taxes are trivial compared to the enormous earning
power you gain by holding onto all your money until it has had a
chance to grow for a few years!  Even though in the long run you
will actually pay more taxes, this is only because you will have
MUCH MORE INCOME!

^1* The limits:

IRAs are set up to let us manage our own retirement.  As such,
they come with certain limitations.  The amount that can be
contributed to an IRA is restricted and once money is in an IRA
it cannot be withdrawn until you reach 59 1/2 years of age.
After age 70 1/2, you MUST withdraw your nest egg at a certain
minimum rate based on your life expectancy.  If you over-
contribute or make premature withdrawals, you will be subject to
stiff penalties. In addition, you cannot borrow against an IRA
account.  There are certain exceptions to these rules, but these
exceptions are outside the scope of this program.

^1*  Who can get an IRA?

Anyone who has "earned income", as opposed to unearned income
like interest.

^1*  How much can I contribute?

You may contribute up to $2,000 each year under the current law,
but all contributions must be based on earned income--tips,
wages, salaries, bonuses, commissions and so on.  Alimony also
counts as earned income. The law sets no minimum contribution,
but many IRA sponsors (banks, mutual funds etc.) set minimums of
their own.  You can contribute as much or as little as you like
each year, within the confines of the $2,000 limit, your earned
income and any limits imposed by your sponsor.

There is a special type of IRA, called a "spousal" IRA that
allows up to a $2,250 contribution each year.  If one spouse has
little or no income, the other spouse can have a regular IRA,
and a separate "spousal IRA".  A total of $2,250 can be
contributed to the two accounts.  These contributions can be
split between the two accounts in any way desired as long as the
total does not exceed $2,250 and no one account receives more
than $2,000 in one year.  The two accounts are treated as
separate in most respects, but the couple must file a joint tax
return.  IRA Investor ignores the spousal IRA since our purpose
is merely to explain IRAs.

^1*  How Much of my contribution can I deduct?

If you are not covered by a retirement plan you may deduct all
of your IRA contributions regardless of your marital status and
income.  Generally, you are considered covered if you have been
an active participant in a plan for any part of the year.  Your
W-2 form from your employer will indicate if you are an active
participant with a check in the "Pension Plan" box.  For married
couples filing a joint return, both spouses are considered
covered if either is an active participant.

If you are an active participant, your deduction will be as
follows, based on your marital status, filing status, and
Adjusted Gross Income (AGI is your taxable income, as calculated
on form 1040).

^1  If you are single or head of household:
  Deduct 100% if your AGI does not exceed $25,000, 0% if it
  exceeds $35,000.  If your AGI is between $25,000 and $35,000
  you will be able to deduct only part of your contribution.

^1  If you are married filing jointly:
  Deduct 100% if your combined AGI does not exceed $40,000, none
  if it exceeds $50,000.  Otherwise you may deduct a portion of
  your contribution.

^1  If you are married filing separately:
  You may deduct a portion of your contribution if your AGI is
  less than $10,000.  Otherwise you may take no deduction.

IRA Investor will compute the exact deduction for you. We also
assume that you will take the full deduction.  Contributons that
you deduct from your taxes now will be taxed upon withdrawal.
The rules used to figure the taxes are complicated, so IRA
Investor will do them for you.

If you make contributions that you cannot deduct, be sure to
keep a record of them.  You must file form 8606 to report non-
deductible contributions.  These contributions will not be taxed
when you begin making withdrawals.

^1* When do I make withdrawals?

You may contribute to your IRA until the calendar year in which
you reach age 70 and one half.  You MUST begin taking
distributions from your IRA by April of the following year.  You
CANNOT make withdrawals before you reach age 59 and one half.
If you do, or if you contribute more than the $2,000 limit, you
will face TERRIFIC penalties!  Between ages 59 1/2 and 70 1/2
you enjoy complete flexibility to contribute or withdraw as you
need.

This is a good place to mention that before you invest in an
IRA, you should consult your financial advisor, talk to your
bank, visit your book store and take whatever other steps are
needed to find out all the details as they apply to your
situation.  IRA rules are not hard to understand, but they are
tedious and must be followed to the letter.

^1*  So does it matter when I actually retire?

No.  As long as you have earned income and are under age 70 1/2,
you may continue to make contributions.  As long as you are over
59 1/2 you may make withdrawals.  If you are over 70 1/2 you
MUST make withdrawals.  Simple.

^1*  How much do I have to withdraw?

The IRS doesn't want you to put off withdrawals indefinitely.
Once you reach age 70 1/2, you must make a minimum withdrawal
each year based on your life expectancy, or the joint life
expectancy of you and your spouse.  If you are 71, the IRS
figures your life expectancy to be 15.3 years, so if you have
$500,000 in your account, you must take out $32,679 each year.
Don't be too concerned with the calculation of the minimum
withdrawals for three reasons.  First, there are other ways of
calculating them and these may change by the time you retire.
Second, most IRAs work with a bank as custodian or trustee, and
the bank will make the calculations for you when you reach age
70 1/2.  Three, a lot of things can change between now and the
time you retire, including the IRS's estimate of your life
expectancy.  Until then, a rough guess is good enough for
planning needs.


That's about it.  IRAs are not too difficult to comprehend.
Like anything involving the IRS, they simply have many details.
Of course, IRA Investor is merely a teaching tool.  There are
many more details than we can cover here, such as penalties,
taxation of distributions (the payments made from your account),
rolling over one IRA into another and so on.  But we have the
essential basics needed to see the benefits of the IRA and to
develop the beginning of an investment plan.  If you need more
information on IRAs, check out IRS publication 590, "Individual
Retirement Arrangements.

The basic idea behind an IRA is that you make steady payments
into the account for a number of years, possibly stop payments a
few years before retirement, and then draw down the balance
during retirement.  IRA Investor is only designed to show you
the value of tax-deffered compounding so it assumes that you
will take a single lump-sum distribution, but you are unlikely
to do that in real life. In theory, once you start taking
distributions, you could take a yearly distribution equal to the
year's interest, thereby creating a permanent source of income!

^1*  Sounds nice eh?

Well, there are two reasons that I said "in theory".  First, in
practice you can't save enough in an IRA to live terribly well
on only the interest it earns--a million dollars seems like a
lot, but just divide it by about ten and account for inflation!
Second, the IRS won't let you get away with it.  You have to
take distributions designed to draw the balance down to zero
before you die.

But the "Theory" is the beginning of a retirement plan.  You may
not be able to live on only the interest, but you MAY be able to
live on the interest plus a fraction of the balance.  Even in
practice, it is possible that your IRA could have a high enough
yield to cause your payments to grow larger each year!

This way you draw the balance down over a number of years, and
hopefully have a good retirement income--or better yet--
investment income.  Who says you can't invest those IRA
distributions in some short term bonds?  The point is, if you
invest in an IRA at an early age, you'll have MUCH more money to
work with come retirement, than if you just stick money in a
savings account and pay taxes on the interest it earns!

^1*  So is an IRA really my "greatest discovery"?

Well, that depends.  If you already have a secure future, you
can probably do better by investing in real estate or electric
banjoes or something.  If you have a pension plan at work, you
should give it a look.  Not only will it probably make your IRA
contributions nondeductible, it may be a better deal.  The SEP-
IRA for example, let's you contribute much more than a regular
IRA.  The 401(k) plan has this advantage, plus you may be able
to borrow against it and your employer may make matching
contributions.  Some such plans also offer a tax break when it
comes time to withdraw your nest-egg.  But then there is the
issue of control.  How will the money in a 401(k) plan be
invested?  With an IRA, you can choose to take charge of your
investments, or get your sponsor to do it for you, as you wish.

For many of us, the choice is between using an IRA as a tax
shelter and having none at all.  As the IRA Investor shows, the
benefits of tax-defferred growth are gigantic.  But it also
shows the effects of time.  The earlier we invest, the more we
will have to show for it.


^C^IProgram Notes

To run this program outside the ON DISK MONTHLY menu, type:

^C^1IRA

Other options available:

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     IRA /S         runs in silent mode

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