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IN DEPTH ON IRAS

June 25, 2008

The Congressional Joint Committee on Taxation has issued a comprehensive look at how IRAs work. From the overview:

IRAs play a significant role in retirement savings. For 2005, individuals contributed approximately $57.4 billion to IRAs and rolled over $231.3 billion into IRAs. At the end of 2005, approximately 51.5 million taxpayers held $3.5 trillion in IRAs, based on fair market value.

There are two basic types of IRAs under present law: traditional IRAs, to which both deductible and nondeductible contributions may be made, and Roth IRAs. The principal difference between these two types of IRAs is the timing of income tax inclusion. For a traditional IRA, an eligible contributor may deduct the contributions made for the year, but distributions are includible in gross income. For a Roth IRA, all contributions are after-tax (no deduction is allowed) but, if certain requirements are satisfied, distributions are not includable in gross income. Both types of IRAs grant consumption tax treatment to retirement savings, and thetwo types are generally economically equivalent.

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