IRAs
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There are three main types of IRAs (not including
employer sponsored IRAs such as the SEP or SIMPLE):
 | Traditional IRA |
| Rollover IRA |
| Roth IRA |
Traditional IRA. This type of IRA is designed for individuals
to hold rollovers from their 401k or 403b company plans. It is
also designed as a tax shelter to hold money contributed by individuals
for their retirement. Because most funds in these accounts were
deposited on a pre-tax basis, when you retire and begin withdrawing the
funds, you will pay income taxes on the withdrawals at your then-current
tax rate (probably lower than the rate you pay during your working
years).
Rollover IRA. Basically, this is the same as a Traditional IRA
with one exception. If you rollover your 401k or 403b money from a
previous employer into a Rollover IRA, then it remains possible for you
to roll out of the IRA and into a new employer sponsored plan.
Typically this is NOT a good idea simply because in an IRA you will have
more investment choices than in an employer sponsored plan AND because
employer sponsored plans typically have higher fees than an IRA.
So ignore the "Rollover IRA" and use the Traditional IRA instead.
Roth IRA. This type of IRA is designed for individuals to
contribute retirement funds on an after-tax basis. In other words,
the contributions for this type of IRA typically come directly from your
wallet or bank account and NOT as deductions from your income via work.
The main advantage of a Roth IRA is that when you retire and begin
withdrawing the money you pay NO TAXES on the withdrawals. |
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| An Individual Retirement Account (regardless of Roth or
Traditional) provides tax-advantaged savings for retirement investors
and may be an effective way to supplement your other long-term savings
vehicles. Investments in tax-deferred accounts can compound more quickly
than those in comparable taxable accounts. |
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| If you've contributed the maximum to an
employer-sponsored retirement plan (such as a 401(k) plan), consider an
IRA as the next building block toward a more comfortable retirement. |
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| Roth IRAs offer federally tax-free withdrawals.
Traditional IRAs offer tax-deductible contributions to qualified
investors. Not everyone will be allowed to deduct their
contributions to a Traditional IRA, but everyone is allowed to
contribute (with or without the deduction) regardless of income and
regardless of whether you have a 401 or 403 at work. |
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| An IRA is a tax shelter, not an investment. Think
of an IRA as a container for your investments. You can choose to fill
this container with mutual funds, stocks, bonds, or other types of
investments. And since the container has the IRA label on it, it
will grow either tax free or at least tax deferred. |
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| Assets grow federally tax-free with a Roth IRA. This means you'll
never have to pay federal income taxes on your earnings, provided
certain requirements are met. (Qualified Roth IRA distributions or
earnings are also exempt from state taxes in most states.) |
| Contributions can be withdrawn at any time penalty and tax-free. |
| Retirement withdrawals are completely tax-free |
| You can leave your Roth to your heirs and the account can continue
to grow tax-free for the remainder of their lives. This provides
2 generations of tax-free compounding. During the life of your
beneficiaries, they will slowly withdraw the funds, again tax-free. |
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| A Traditional IRA allows your assets to grow tax-deferred, meaning
you won't pay any taxes on earnings until you withdraw the assets.
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| For many investors, contributions to a Traditional IRA will also
be tax-deductible. |
| A few low income investors can even receive a tax credit for
contributions. |
| You can leave your Traditional IRA to your heirs and the account
can continue to grow tax-deferred for the remainder of their lives.
During the life of your beneficiaries, they will slowly withdraw the
funds and pay income tax on those withdrawals. |
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| You must be under age 70½ with earned
compensation or be eligible for a spousal IRA. Spousal IRA is
available to any spouse regardless of household income level.
Contributions to a spousal IRA may also be deductible - see
below, "Tax Deductible Contributions"
Make your spousal IRA a Traditional IRA if your household
income is too high to qualify for a Roth. |
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| You may contribute at any age as long as you
have earned compensation subject to income limits: |
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| For single filers: Up to $95,000 (to qualify
for a full contribution); $95,000-$110,000 (to be eligible for a
partial contribution) |
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| For joint filers: Up to $150,000 (to qualify
for a full contribution); $150,000-$160,000 (to be eligible for
a partial contribution) |
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| Federally tax-free growth |
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| The maximum annual contribution limits are as
follows: |
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| 2003-2004 |
$3,000 |
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| 2005-2007 |
$4,000 |
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| 2008 |
$5,000 |
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| After 2008, the limit will be adjusted for
inflation in $500 increments. |
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| In addition to these contribution limits,
workers age 50 and older (as of the end of the year) will be
able to make increased annual contributions as follows: |
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| 2003-2005 |
$500 |
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| 2006 and thereafter |
$1,000 |
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| The maximum annual contribution limits are as
follows: |
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| 2003-2004 |
$3,000 |
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| 2005-2007 |
$4,000 |
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| 2008 |
$5,000 |
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| After 2008, the limit will be adjusted for
inflation in $500 increments. |
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| In addition to these contribution limits,
workers age 50 and older (as of the end of the year) will be
able to make increased annual contributions as follows: |
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| 2003-2005 |
$500 |
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| 2006 and thereafter |
$1,000 |
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| Yes, subject to retirement plan
participation status and Adjusted Gross Income (AGI) limits |
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| For tax year 2004, the full
deductibility AGI limits are raised to $65,000 or less (joint)
and $45,000 or less (single); partial deductibility AGI limits
are raised to $75,000 (joint) and $55,000 (single). |
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| Any earnings and deductible
contributions subject to tax upon withdrawal. |
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| Contributions can be withdrawn at
any time without paying taxes or penalties. Earnings can be
withdrawn federally tax free and penalty free if the five-year
aging requirement and certain other conditions are met. |
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| Yes, if you are under age 59½ and
the withdrawal is not for the following reasons: |
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Death of the account owner |
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Part of a series of substantially
equal periodic payments |
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Health insurance premium payments
for unemployed individuals |
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Payments of medical expenses in
excess of 7.5% of an individual's adjusted gross income |
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Qualified First Time Homebuyer |
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Higher Education Expenses |
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IRS Levy |
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| Contributions can be
withdrawn at any time without penalty. For earnings, penalty
applies if you are under 59 ½ and the withdrawal does not
qualify as: |
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Qualified higher education
expenses; |
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Qualified first home purchase
(lifetime limit of $10,000); |
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Certain major medical expenses; |
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Certain long-term unemployment
expenses; |
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Disability; or |
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Substantially equal periodic
payments. |
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| Minimum required distributions must
start at age 70 ½ |
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| Anyone, regardless of income can contribute
to a spousal IRA. Even if only one spouse works outside the home
and the other spouse has no income of his/her own, the non-paid spouse
can contribute to an IRA. Roth is probably the first choice, but
only if the total household income falls below the Roth AGI level.
Otherwise, no matter how high the household income the stay at home
spouse can contribute to a Traditional IRA. |
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| A spousal IRA is a way for working spouses
who are not covered by an employer-sponsored plan or non-working spouses
to have a Roth or Traditional IRA of their own with little or no earned
income of their own. |
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| To be eligible to contribute to a Roth IRA,
regular AGI limits apply. |
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| Don't be confused between being "eligible"
to contribute to a Traditional IRA vs. "deductibility" of the
contribution to a Traditional IRA. Everyone is "eligible", but
only if your income is low enough will the contribution also be
"deductible". For deductible contributions to a Traditional IRA,
see the table below. |
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Only one spouse is
covered
by a retirement plan at work |
Full deductibility for
AGI less than $150,000; partial deductibility for AGI of
$150,000-$160,000 |
| Neither spouse is covered by a
retirement plan at work |
No AGI limit |
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| A few key questions can help
you decide if a Traditional IRA or a Roth IRA is right for you: |
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Does your Adjusted Gross Income and your
tax filing status make you eligible for a Roth IRA? |
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If YES, Skip to Question
2. |
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If NO, consider contributing to
a Traditional IRA where you'll enjoy tax-deferred earnings. (Skip the
remaining questions.) Since your income is relatively high, your
contribution to a Traditional IRA won't be deductible. However,
your contributions will grow tax deferred until you retire. |
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| 2. |
Are you eligible to deduct contributions to a
Traditional IRA? |
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If YES, skip to Question 3. |
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If NO, Roth is probably the
right choice for you. By contributing to a Roth IRA you will enjoy
federally tax-free earnings. (Skip the remaining question.) |
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| 3. |
Do you expect your tax rate to be the same or higher
when you retire? |
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If YES, even though you can
deduct the contribution to a Traditional IRA, you should probably
consider contributing to a Roth IRA and enjoy federally tax-free
earnings. The reason to choose a Roth over the deductible
Tradition IRA is that with the Roth, you will pay zero taxes when you
withdraw the money. However, if you take the deduction now, you
will pay income taxes on all withdrawals at your higher expected income
tax rate at retirement. |
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If NO, consider contributing to
a Traditional IRA. You will receive a deduction for the
contribution now and you will enjoy federally tax deferred growth of the
assets until you retire. |
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| You should now have a good idea as to which
type of IRA may best suit your situation. For many individuals,
contributing to a Roth IRA may result in more retirement income than a
comparable investment in a Traditional IRA. If you are eligible,
consider making your annual contribution to a Roth IRA. |
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| On the other hand, even if you aren't
eligible for a Roth IRA, anyone under age 70½ who has compensation can
take advantage of the benefits of a Traditional IRA, including
tax-deferred growth and the potential for tax-deductible contributions.
With either type of IRA, you may still come out ahead of a comparable
taxable investment because earnings aren't eroded by taxes year after
year. |
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