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Questions about IRA
Traditional and Roth IRA - Which is Right for you?
Traditional IRA
Non-Deductible IRA
Roth IRA
To Help Decide Which IRA Is Best For You
Can a Traditional IRA transfer to a Roth IRA?
The Education IRA
What is an Education IRA?
The benefits of an Education IRA
For whom may an Education IRA be established?
Who is eligible to contribute to an Education IRA?
May I change the beneficiary?
Who is considered a family member?
Who can participate and contribute?
Are IRA contributions tax deductible?
Traditional and Roth IRA - Which is Right for you?
There is a wide variety of tax-advantaged ways for individuals to save for retirement. Because of their income tax benefits and because IRAs are so easily established, they have become one of the most often used retirement savings vehicles available today. Recent tax laws, however, have created three very unique types of IRAs - the Traditional IRA, the Non-Deductible IRA and the newer Roth IRA.
Traditional IRA
Traditional IRAs allow a working individual under the age of 70 ? to contribute up to $2,000 of compensation each year, tax-deferred, for retirement and other important financial goals. Earnings on these contributions grow tax-deferred until withdrawals. Married couples who file jointly may contribute up to $4,000 ($2,000 per IRA), even if only one spouse has earned income, certain limitations apply. Your IRA contributions may also be deductible depending on your participation in an employer maintained retirement plan, your adjusted gross income, and your filing status. Withdrawals are subject to ordinary income tax and may be subject to a 10% federal penalty if taken prior to age 59 ?.
Non-Deductible IRA
Similar to the Traditional IRA, the Non-Deductible IRA allows a working individual under the age of 70 ? to contribute up to $2,000 of compensation each year. Unlike the Traditional IRA, the Non-Deductible IRA contribution is made with "after-tax" dollars - the income tax deduction allowed the Traditional IRA is not available to the Non-Deductible IRA. For the most part, the Non-Deductible IRA is utilized by those who do not qualify for the Traditional IRA, but can benefit from the "tax deferral" of earnings allowed with the Non-Deductible IRA.
Roth IRA
The Roth IRA is available as an alternative to the traditional IRA. If you have earned income you may be eligible to make non-deductible contributions of up to $2,000 a year to the Roth IRA, even after age 70 ?. This $2,000 is the maximum annual combined contribution that can be made to both types of IRA's (traditional and Roth), not counting rollover contributions. Funds, including earnings, can potentially be withdrawn from a Roth IRA federal tax-free. Withdrawals are generally federally tax-free if the distribution is taken five years after the first contribution and after you have reached age 59 ?. Please consult your tax advisor for additional ways to qualify for tax-free treatment of Roth distributions. Withdrawals of earnings prior to age 59 ? may be subject to income tax and a 10% federal penalty.
To Help Decide Which IRA Is Best For You
Many factors must be considered, such as current and future income tax rates, investment returns, what the money will be used for and when, income, marital status, and the availability of a retirement plan at work. We can assist you in examining your personal situation to help you tailor your retirement plan to your individual needs.
Can a Traditional IRA transfer to a Roth IRA?
Yes. When a Traditional IRA plan holder elects to move (rollover) his/her retirement assets into a Roth IRA, The following conditions must be met:
- The IRA holder's AGI must be less than $100,000.
- If married, must file a joint income tax return.
- Must pay taxes on all pre-tax dollars that are rolled over.
- The rollover must be completed within 60 days from the closure of the Traditional IRA. Potential tax and penalty implications may occur.
- When can a distribution be taken?
- By meeting the following two qualifying conditions, Roth IRA plan holders may take tax-free and penalty-free withdrawals:
- The plan must have been opened for a minimum of five years.
The occurrence of one of the following:
- Age 59 ?
- Disability
- Qualifying first home purchase
- Death
Distributions which meet the above requirements a referred to as "qualifying distributions." Any distributions from a Roth IRA that are not qualifying distributions will be subject to taxes and, perhaps, early distribution penalties to the extent that they exceed the aggregate contributions to the Roth IRA.
This document is not intended to provide tax or legal advice. Please consult with your tax and/or legal advisor before making your investment decision.
The Education IRA
One of the greatest challenges facing parents today is saving the money required to finance a child's higher education. The Education IRA provides a convenient, tax friendly way to help you accomplish this important goal.
The Education IRA. What is an Education IRA?
An Education IRA is a tax deferred investment account created for the sole purpose of paying for future qualified expenses associated with a child's higher education.
The Education IRA. The benefits of an Education IRA
Allows total after-tax contributions of $500 per year, per child, until they reach the age of 18.
Provides tax-deferred growth.
May be rolled over to eligible family members.
More than one person can contribute to a child's Education IRA(Not to exceed $500 per year).
Examples of Qualified Higher Education Expenses
- Tuition
- Fees
- Books
- Equipment
- Supplies
- Room and Board
The Education IRA. For whom may an Education IRA be established?
An Education IRA may be established for the benefit of any child under the age of 18. However. Contributions to an account will not be accepted after the child reaches his or her 18th birthday.
The Education IRA. Who is eligible to contribute to an Education IRA?
Any individual may contribute up to $500 to a child's Education IRA if their modified adjusted gross income for the taxable year is no more than $95,000($150,000 for married taxpayers filing jointly). Above these levels the maximum contribution is gradually phased out.
Taxpayers with modified adjusted gross incomes above $110,000($160,000) for married taxpayers filing jointly) are not allowed to make contributions to anyone's Education IRA.
The Education IRA. May I change the beneficiary?
You are allowed to change the designated beneficiary (child) However, the new beneficiary must be an eligible member of the family.
The Education IRA. Who is considered a family member?
- Children, grandchildren, and stepchildren.
- Brothers, sisters, stepbrothers, and stepsisters.
- Parents, stepparents, and grandparents
- Nephews and nieces
- Uncles and aunts
- Spouses of eligible family members.
Who can participate and contribute?
Anyone under the age of 70 ? with earned income.
Each IRA holder may contribute up to $2,000 annually.
A non-working spouse may contribute$2,000 to his or her own IRA.
Are IRA contributions tax deductible?
A significant advantage for some individuals is the potential immediate tax benefit to contributing assets to an IRA. Annual IRA contributions can receive a 100%deduction on a tax return if the IRA holder:
- Is not receiving benefits under an employer retirement plan
- Is not earning more than $50,000 if married and filing jointly, $30,000 if filing singly. Amounts will continue to be indexed annually through the year 2007.
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