Individual Retirement Accounts (IRA)
Traditional / Rollover IRA
- An IRA can be established by most individuals below age 70 1/2 who have earned income, and they can contribute up to $5,000 ($6,000 if you are age 50 or older) per year into an IRA if the earned income is at least equal to the amount contributed. All, some or none of that $5,000 ($6,000 if you are age 50 or older) may be tax deductible.
- A full $5,000 ($6,000 if you are age 50 or older) deductible contribution per person is available for each working couple if joint income is below $85,000 and below $53,000 for single filers. Partial deductibility is available for married persons with couple's incomes between $85,000 and $105,000, and partial deductibility is available for single filers with income between $53,000 and $63,000.
- A deductible IRA cannot be established by individuals who participate in various company, agency or not for profit retirement plans: SEP IRAs, SIMPLE IRAs, 401Ks, 403Bs, 457plans, Deferred Compensation Plans, etc., unless their income is below $53,000 for individuals, and below $85,000 for married couples.
- An individual who is not active in a company plan, but whose spouse is active, may make a deductible contribution to an IRA, if their income is below $159,000.
- Dividends, interest and capital gain growth within an IRA are not taxable and monies eventually removed are taxable as ordinary income. Withdrawals prior to age 59 1/2 may be subject to taxes, and a 10% IRS penalty.
- Avoidance of 10% IRS penalty (but not taxes) on withdrawals prior to age 59 1/2 is available if owner takes substantially equal periodic payments over his/her life expectancy based on IRS life expectancy tables. You need to do this for at least five years.
- Distributions- withdrawals are required starting after owner turns 70 1/2. A 50% penalty of the amount that should have been withdrawn is assessed for non-compliance.
- One can withdraw a lifetime maximum of $10,000 (contributions and earnings) without taxes or penalties for a first time home purchase.
- Withdrawals from traditional IRAs can be made for higher educational expense without penalty.
- Various investment choices for funds available.
Roth IRA
- Available as of January 1998.
- A Roth IRA can be established by most individuals regardless of age who have earned income below a certain specified threshold.
- A Roth IRA can be established by individuals who participate in various company, agency or not for profit retirement plans: SEP IRAs, SIMPLE IRAs, 401Ks, 403Bs, 457plans etc.
- Up to $5,000 ($6,000 if you are age 50 or older) per year per participant can be contributed to a Roth IRA if the earned income is at least equal to the amount contributed.
- No contribution is allowed when modified family annual gross income reaches $169,000 or more per year for married couples and $110,000 or more for single filers.
- A full $5,000 ($6,000 if you are age 50 or older) non-deductible contribution is available for each working couple if joint income is below $159,000 and below $101,000 for single filers
- Dividends, interest and capital gain growth within a ROTH IRA is not taxable and monies eventually removed are tax-free if account is owned at least 5 years and owner is over 59 1/2.
- Unlike Traditional IRAs there are no minimum distributions and withdrawal requirements after age 70 1/2
- At any age, after the account is opened 5 years one can withdraw a lifetime maximum of $10,000 (contributions and earnings) without taxes or penalties for a first time home purchase.
- At any age, for any reason one can withdraw the amount(s) contributed (not earnings) without tax or penalties.
- Various investment choices for funds available.
Converting to a Roth IRA
- Available as of January 1998. Many traditional IRA investors have the option to convert their Regular IRAs to a Roth IRA.
- Deductible Regular IRAs offer investors a taxable-deductible contribution on funds going into a Regular IRA, tax-deferred growth on all earnings while in a Regular IRA and taxable income when distributions are taken from a Regular IRA; whereas, ROTH IRAs offer investors a non-deductible contribution going into a ROTH IRA, tax deferred growth while in a ROTH IRA and tax-free income when distributions are taken from a ROTH IRA under certain conditions.
- Withdrawals from ROTH IRAs are tax-free if account opened at least five (5) years and owner is over 59 1/2. At any age, after the account is opened 5 years one can withdraw a lifetime maximum of $10,000 (contributions and earnings) without taxes or penalties for a first time home purchase for account owner or others. At any age, after the account is opened 5 years for any reason one can withdraw the amount(s) contributed (not earnings) without tax or penalties from a ROTH IRA.
- Unlike Regular IRAs, there is no requirement to ever withdraw from a ROTH IRA, hence these accounts can be held until death and passed on to spouses, children or other heirs on a tax-free basis.
- No conversion from a Regular IRA to a ROTH IRA is allowed when modified annual gross income reaches $100,000 (married couples filing jointly and single filers) or more per year during the year in which the conversion takes place.
Comparison Traditional and Roth IRA
|
TRADITIONAL |
ROTH |
|---|---|---|
MINIMUM AGE TO QUALIFY |
No minimum age (however Midland National requires IRA annuitant/owner to be Age of Majority in resident state) |
No minimum age (however Midland National requires IRA annuitant /owner to be Age of Majority in resident state) |
SERVICE REQUIREMENT |
You must have earned income |
You must have earned income |
CONTRIBUTION LIMIT (WITHOUT 50+ CATCH UP) |
$5,000 year 2009, $5,000 year 2010; cannot contribute more than earned income |
$5,000 year 2009, $5,000 year 2010; cannot contribute more than earned income |
CATCH-UP CONTRIBUTION (FOR PARTICIPANTS AGE FOR 50+) |
$1,000 |
$1,000 |
TAX DEDUCTIBILITY |
Deduction is allowed if you are not an active participant in an employer-sponsored plan. If you are an active Participant in an employer-sponsored plan, your income will be subject to the phase-out chart (see IRA section) |
N/A since Roth IRA contribution consists of after-tax money |
MAXIMUM CONTRIBUTION AGE |
Contributions cannot be made starting in the year you attain age 70 1⁄2 |
No maximum age for contribution (provided you have earned income) |
ANNUAL CONTRIBUTION DEADLINE |
Contribution must be postmarked by the due date of tax returns (typically April 15) |
Contribution must be postmarked by the due date of tax returns (typically April 15) |
REQUIRED MINIMUM DISTRIBUTIONS |
Required Minimum Distributions must begin by April 1 of the year after participant attains age 701⁄2 |
No Required Minimum Distribution while Roth IRA owner is alive |