Roth IRA
Allows only nondeductible contributions and features tax-free/penalty-free withdrawals after a five year holding period for certain contributions. You may benefit more from this type of IRA if you expect to be in a higher tax bracket when you retire.
Traditional IRA
This account allows you to defer taxes on earnings until they are withdrawn. Certain contributions to this IRA are tax deductible, unlike the Roth.
Coverdell IRA
This is a nondeductible account featuring tax-free withdrawals, but only for a child's education expenses.
Eligibility
Roth IRA
Must have earned income and your Modified Adjusted Gross Income (MAGI) must fall within established limits (ask a Customer Service Representative for more information on MAGI Ranges). Other pre-existing retirement plans do not necessarily disqualify you from establishing an IRA.
Traditional IRA
Must be younger than 70 ½ for an entire tax year with earned income. Other pre-existing retirement plans do not necessarily disqualify you from establishing an IRA.
Coverdell IRA
The beneficiary on the account must be under 18 years old. There are no requirements that a contributor must have earned income or be any certain age. Non-individuals, such as corporations and benefit organizations may also be contributors.
Contributing
You can contribute up to 100% of your income up to $4000 to a traditional IRA. Individuals 50 and over may have the option of "catching up" by contributing additional funds, currently up to an additional $1000. The deadline for contributions in a taxable year is the day your tax return is due, excluding extensions. For most taxpayers, this is April 15th.
Tax Information
Tax Deductions
Deductions are available only for traditional IRAs. Deductibility is based on whether you or your spouse participates in an employer-sponsored retirement plan. If you are a participant, deductibility depends on your Modified Adjusted Gross Income (MAGI) and income filing status. Depending on these factors you may be eligible for a full, partial, or no deduction. Your tax professional can help you determine your exact deduction. Even if you don't qualify for deductions, you can still take advantage of the tax-deferred earnings. In general, these are the rules for determining deductability:
If you and/or your spouse is not active in an employee sponsored retirement program, you are eligible for a full deduction regardless of income.
If both you and your spouse participate, or if you're a single participant, you may be eligible for a full or partial deduction depending on your MAGI.
]If you are not an active participant but your spouse is and you file a joint federal income tax, you are eligible for a full deduction as long as your joint MAGI falls below $150,000. You qualify for a partial deduction if your joint MAGI is between $150,000 and $160,000.
Paying Federal Taxes on Earnings
Traditional IRA
All earnings on your traditional IRA are tax deferred until you make withdrawals, at which point they are taxed as income for the fiscal tax year in which they are withdrawn.
Roth IRA
Probably the best part of a Roth IRA is that you don't pay taxes on any earnings your contribution has generated. This is only true provided you withdraw earnings as part of a qualified distribution. This requires meeting a five year holding period and distributions are taken due to having turned 59½, permanent disability, a first-time home purchase, or in the event of your death.
Coverdell IRA
While you may not take tax deductions for contributions, there are no taxes due on any interest upon beneficiary withdrawal.
Withdrawals Without Penalties
For both Roth and Traditional IRAs you can withdrawal without a 10% penalty anytime after you reach 59½. Other factors include becoming disabled, medical expenses in excess of 7.5% of your adjusted gross income, for health care insurance after receiving unemployment for at least 12 weeks, distributions paid directly to the IRS as a result of an IRS levy, qualified higher education purposes, or for first time home buyers. For Traditional IRAs, when you reach the age of 70 ½, you must take minimum distributions or face severe tax penalties. For Roth IRAs, you may receive original (principal) contributions tax and penalty free at any time and for any reason.
Moving Funds From One IRA to Another
There are two methods in which this can be done: a rollover and a transfer. For a rollover, you must act within 60 calendar days following the date of receipt of the IRA. Rollovers may not occur more than once in a 12 month period per each IRA you own. A transfer occurs when funds are moved to another IRA without you having custody or control of the funds. There are no time or frequency constraints on transfers.
Converting a Traditional IRA to a Roth IRA
A single or joint tax filer with a MAGI of $100,000 or less may convert a traditional IRA into a Roth IRA. A married individual who files a separate return may not convert. The amount converted will be subject to income taxes but not a 10% premature distribution penalty.
Why Not Just Open Both a Traditional and a Roth IRA?
Exactly. Why not? This would give you greater flexibility in deciding how to handle your retirement investment. Each type has its own benefits and downfalls, allowing you to tailor your IRA related decisions to fit your current situation and needs.
Questions?
Ginger Polden
IRA Officer
320-983-1323 Secure Email