IRA Options
Learn More About IRAs
Individual retirement arrangements, known as IRAs, are personal savings plans to accumulate funds for retirement. If you (or your spouse) have taxable earned income you may qualify for an IRA. Interest earned on IRAs is tax-deferred. Depending upon your circumstances and the type of IRA you use, contributions may be tax deductible and distributions may be subject to tax.
Contributions are limited and depend upon a number of factors. Generally, distributions taken from an IRA before age 59 ½ are subject to IRS penalties and/or taxes.
The following information is a summary. Please consult your tax adviser or financial planner for information specific to your situation.
Traditional IRAs are designed to provide a tax deduction in the year of the contribution plus tax-deferred growth of interest. One premise behind the IRA is that the contributor’s tax bracket will be higher while making contributions and lower during the years of receiving distributions. Certain income and contribution limitations and distribution rules apply.
General Features of a Traditional IRA:
- Can be opened at any time
– $100
-
Contributions can be made for the previous year up to the tax filing deadline and may be tax-deductible (limitations apply)
- No contributions are allowed after reaching age 70 ½
- If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you may quality to take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of:
- $5,000 ($6,000 if age 50 or older) OR
- 100% of compensation
- Tax deductions for contributions are limited. Limiting factors include:
- Participation in an employer retirement plan
- Income and filing status
- Social Security benefits received
- Distributions are allowed from a Traditional IRA without IRS penalty after age 59 ½
- Distributions are required from a Traditional IRA upon reaching age 70 ½
- Distributions are subject to income tax in the year received
Please consult your tax adviser or financial planner.
Roth IRA contributions are not tax-deductible, but when certain requirements are met, qualified distributions may be tax free.
Special features of a Roth IRA include:
- Contributions can be made after reaching age 70 ½
- Distributions from a Roth IRA after age 59 ½ may be tax free
- The Roth IRA must have been set up for at least five years for distributions to be tax free
- No mandatory distribution requirement – amounts can be left in a Roth IRA for as long as you live
Please consult your tax adviser or financial planner.
Maximum IRA contribution to a traditional or Roth IRA.
Contribution deduction amounts to a traditional IRA may be reduced depending upon your modified adjusted gross income and if you are covered by an employer retirement plan.
Under age 50 at the end of 2009 = the smaller of $5,000 or your taxable compensation for 2009
Limit may be split between traditional and Roth IRAs; combined limit of $5,000 applies.
50 years of age or older before 2010 = the smaller of $6,000 or your taxable compensation for 2009
Limit may be split between traditional and Roth IRAs; combined limit of $6,000 applies.
You are allowed to convert funds from a Traditional IRA to a Roth IRA, which offers more attractive distribution rules. You may qualify to move the assets without the usual penalty tax for early withdrawal. Once reclassified, the account will operate as Roth IRA. The conversion is a taxable event for income tax purposes, but when you take distributions from the Roth IRA, the distributions will not be subject to income tax.
Beginning in 2010, there are two major changes to the tax rules regarding conversions to Roth IRAs:
- The AGI limitations will no longer apply for taxpayers converting eligible retirements to a Roth IRA
- Married taxpayers filing separate returns will be eligible to convert
Roth conversions will generally result in taxable income. However, for conversions taking place in 2010 only, a special rule applies: Half the income from the conversion will be taxable in 2011 and the remaining half will be taxable in 2012. You will also be allowed to elect out of the two year spread by including the entire amount in the 2010 Form 1040.)
Please consult your tax adviser or financial planner.
A Simplified Employee Pension (SEP) is an employer established and funded retirement plan. SEP plans are often used by small businesses and sole proprietors.
Please consult your tax adviser or financial planner.
There are many reasons for an individual to move retirement assets. Moving funds between IRAs and between IRAs and Qualified Employer Plans will involve three types of transactions – transfers, rollovers and direct rollovers.
Transfers can be used to move assets:
- Between like IRAs (Traditional IRA to Traditional IRA; Roth IRA to Roth IRA)
Rollover can be used to move assets:
- Between like IRAs (Traditional IRA to Traditional IRA; Roth IRA to Roth IRA)
- Between Traditional IRA and a Qualified Employer Plan
Direct Rollover can be used to move assets:
- Between Traditional IRA and a Qualified Employer Plan
Some restrictions apply. Please consult your tax adviser or financial planner.
“Catch-up” contributions are allowed for people age 50 and older. After the maximum regular contribution is made to the IRA or employer-sponsored plan, the individual may contribute an additional $1,000. Catch-up contributions may be tax-deductible if certain income restrictions are met.
Please consult your tax adviser or financial planner.
With a Coverdell Education Savings Account, formerly referred to as an Education IRA, money can be contributed each year for a beneficiary under age 18 (or a special needs beneficiary) to be used for qualified education expenses. Limitations apply to contributions and distributions.
Features of a Coverdell Educations Savings Account:
- Contributions are limited to $2,000 per beneficiary per year
- Contributions are not tax deductible
- Amounts deposited grow tax free until distributed
- Distributions for eligible education expenses may be tax free (limitations apply)
- Eligible educational institutions include:
Postsecondary Institutions — college, university, vocational school or other
postsecondary educational institution eligible to participate in student aid program
administered by U.S. Department of Education
- Elementary and Secondary Institutions — any public, private or religious school that provides elementary or secondary education (K-12) as determined under state law
- Account balance must be distributed within 30 days of beneficiary reaching age 30 or the death of the beneficiary
Please consult your tax adviser or financial planner.
