IRA Frequently Asked Questions
Traditional IRA
A Traditional IRA is the IRA originally chartered by the U.S. government. There are two primary benefits
of a Traditional IRA.
- The earnings of the IRA are tax deferred until withdrawn.
- For many taxpayers, the contributions to the IRA are tax deductible.
Roth IRA
A Roth IRA is a more recent form of a retirement savings plan. The principal benefit of a Roth IRA is that all earnings will accumulate tax-free.
Traditional IRA vs. Roth IRA
Differences at a glance:
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Traditional IRA
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Roth IRA
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Deductible tax contributions for qualified investors
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Tax contributions are not deductible
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No tax-free withdrawals
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Tax-free withdrawals for qualified distributions
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Withdrawal penalty of 10% if you are under the age of 59 1/2 (Some exceptions apply.)
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Withdrawal penalty of 10% on earnings if you are under the age of 59 1/2 (Some exceptions apply. Must also meet Roth IRA five-year aging requirement.)
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Eligibility under age 70 1/2 with earned compensation
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No age restriction as long as you have earned compensation
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Mandatory distributions must begin at age 70 1/2
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No mandatory distributions
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Yes. All conversion contributions to a Roth are taxable when converted and also become the basis in the account. (Refer to a tax advisor if you ever made non-deductible contributions to a Traditional IRA.) Some restrictions may apply. Please contact us for more information.
For the tax year 2008, contributions of new dollars to an IRA are limited to $5,000 or 100 percent of earned income, whichever is less. Up to $5,000 can be deposited to either a Traditional or a Roth, or split between the two; but no more than $5,000 between the two. Transfers and rollovers are limited to the amount that was withdrawn from the previous IRA (or qualified plan).
(Note: Individuals age 50 or older can contribute up to $6,000 or 100% of earned income – whichever is less – for tax year 2008.)
You may withdraw from a Traditional IRA at any time. You may, however, be subject to government and financial institution withdrawal penalties. Withdrawals may also be subject to income tax. You must take a Required Minimum Distribution (RMD) from your Traditional IRA each year, starting for the year in which you turn age 70 1/2. You may withdraw your contributions from your Roth IRA at any time with no government penalty. Please see IRS Publication 590 for details.
The government penalty for withdrawing from an IRA prior to age 59 1/2 is 10 percent. The type of investment you choose may also have a withdrawal penalty if you withdraw within a certain period of time (for example, Certificates of Deposit). The 10 percent government penalty is waived under certain conditions.
Traditional and Roth IRAs have their own set of withdrawal rules. Please see IRS Publication 590 for details.
To determine whether you qualify for full or partial tax deferral, please see your tax advisor.
In general, whether you may deduct a Traditional IRA contribution first depends on whether you or your spouse are covered by a company's retirement plan. If there is NO company plan involved, you may be able to deduct the full contribution, up to $5,000 (or $6,000 if age 50 or older).
If you or your spouse are covered by a company plan and are an active participant, you must look at your total Modified Adjusted Gross Income for the year to determine if you are eligible for a full or partial deduction. Please see IRS Publication 590 for details.
In August 2006, the Pension Protection Act of 2006 was passed, which allows for the following:
- EGTRRA provisions were made permanent (e.g., catch-up contributions and saver's credit)
- Cost-of-living adjustments, increasing the income limits for taking IRA deductions
- Penalty-free distributions from IRAs for certain qualified guardsmen and reservists
- Non-spouse beneficiaries may roll plan assets from a Workplace Retirement Plan (e.g., 401(k), QRP) to an Inherited IRA
- Income tax refunds can be paid directly to IRAs
- In 2008, you will be able to roll your qualified plan funds directly to a Roth IRA. (Important Note: This action is a taxable event.)
Calculators
Roth vs. Traditional IRA
This calculator will assist you in deciding where your annual contributions provide the greater benefit.
Roth IRA Conversion
This calculator will assist you in deciding whether or not it is beneficial for you to convert the assets in your Traditional IRA plan to a Roth IRA.
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