NEW YORK (AP) -- One of the best tools for saving for retirement -- the Individual Retirement Account -- has just gotten better.
The tax law enacted last year boosted the limit on IRA deposits to $3,000 this year, and more increases are scheduled in coming years. A special ''catch-up'' provision allows savers 50 and over to invest up to $3,500. The limit for all previously was $2,000.
''If you want a tax-efficient way to save for retirement, you need to look at IRAs,'' said Theresa Fry, a retirement planning expert at A.G. Edwards & Sons Inc. in St. Louis, Mo.
IRAs come in two flavors:
The traditional IRAs -- best for people who have no employer-sponsored retirement program -- let savers deduct their contributions at tax time, and earnings grow tax-deferred until they're withdrawn starting at age 59 1/2.
The newer Roth IRAs, created five years ago, are funded with after-tax dollars. Unlike the traditional version, though, there are no taxes on proceeds withdrawn at retirement if the account has been open at least five years.
Tax law also allows withdrawals of up to $10,000 from traditional and Roth IRAs for the downpayment on a family's first home, and withdrawals can be made for qualified education expenses without the usual 10 percent penalty incurred if the saver has not yet reached 59 1/2.
New York accountant Ed Slott, who publishes Ed Slott's IRA Advisor, is a big fan of Roth IRAs. They're named for former Delaware senator William Roth, who championed their creation.
''The best thing Congress ever created is the Roth IRA,'' Slott said. ''I think people still haven't caught on to it -- or think it's too good to be true. Once they catch on, we could have a whole bunch of Roth IRA millionaires.''
In addition to growing tax-free, a Roth IRA has the added advantage that savings do not have to be withdrawn starting at age 70 1/2, as they do with a traditional IRA, making them a good estate planning tool, Slott said.
A.G. Edwards' Fry said older Americans who haven't yet saved much for retirement can really benefit from the new IRA rules.
''If you're aged 50 and start an IRA this year contributing the maximum, including your catch-up provisions, you could have approximately $167,000 at age 65,'' she said. The figure assumes an 8 percent annual return on your investments. ''Under the old rules, you would have accumulated only about $65,000 by age 65,'' she added.
Younger Americans have the luxury of time to build an even bigger nest egg, Fry pointed out.
Start an IRA at age 30, contribute the maximum each year and, by age 65, you've have more than $1 million in your account, assuming an 8 percent annual return, she said. Under the old rules, you'd have been able to accumulate about $404,000.
So which IRA is best for you?
''If you're not contributing to an employer-sponsored plan, look at the traditional IRA,'' said Pete Syslack, manager of retirement services at Strong Financial Corp. in Menomonee Falls, Wis. ''Because it gives you an opportunity for a tax deduction, that's a good place to start.''
People with employer-sponsored plans, such as 401(k)s and 403(b)s, don't qualify for deductible IRAs but can open Roth IRAs, he noted. But they must have earned income, and their adjusted gross income can't exceed $160,000 for married couples filing jointly or $110,000 for singles.
''If you expect to be in a higher tax bracket when you retire, and a lot of people do because they think they'll have accumulated wealth, then the Roth takes on advantage,'' Syslack said.
Strong has a calculator at its Web site, www.strong.com, so families can compare traditional and Roth IRAs.
There are other reasons to open IRAs.
Many couples overlook that they can set up a Spousal IRA for a non-working husband or wife. It can be either a traditional IRA or a Roth IRA, and can be funded to the annual limit.
Savers should also be aware of Rollover IRAs. They're good places to park money accumulated in a 401(k) or other employer-sponsored retirement account when you leave a job. Because retirement accounts generally are built on pretax dollars, traditional IRAs are used for the rolled money.
For low-income families, the new tax law provides a special tax credit to encourage them to set up retirement savings accounts.
The credit, ranging from 10 percent to 50 percent of the amount invested, is available to a couple that files jointly and earns less than $50,000, to a head of household earning up to $37,500 and to a single person earning up to $25,000.
Tax experts call the credit a good gesture, but point out that financially pressed families might not be able to afford to take advantage of it.
On the Net:
Ed Slott's site: www.irahelp.com
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