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IRA proposal would allow flexibility in withdrawals


What do you get if you cross an Individual Retirement Account with a tax-exempt mutual fund?

The result might look something like the flexible IRA that President Bush proposed in his State of the Union speech.

The president wants Congress to create something called an FIRA. In some ways, it would resemble a regular IRA, but with a few strange twists.

For example, IRAs are designed for long-term investing. If you take money out before age 59 1/2 , you must pay tax on the withdrawal, plus a 10 percent penalty. With a FIRA, if money was left in for at least seven years, it could be taken out tax-free and penalty-free.

Frank McArdle, partner and manager of Hewitt Associates in Washington, a benefits consulting firm, said the FIRA would be especially attractive for young people saving for houses, or for older people who are seven or eight years away from retirement.

Here are some of the other major differences between the IRA and the FIRA:

* Individuals are permitted to put up to $2,000 a year into an IRA, but they could contribute up to $2,500 a year with a FIRA if their income is under $60,000 (single), $100,000 (heads of household) or $120,000 (joint filers).

* IRA contributions are fully deductible for workers not covered by employer-sponsored retirement plans and for individuals with adjusted gross income under $25,000 ($40,000 for joint filers). FIRA contributions are never tax-deductible.

* IRA money grows tax-deferred but is fully taxed at withdrawal. FIRA money could be withdrawn tax-free after seven years.

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