Comparing your Individual Retirement Account Options

Who can contribute?

Traditional IRA - Anyone under the age 70 ½ who has income from compensation (or who is filing jointly with a spouse who earns compensation).

Roth IRA - Anyone who has income from compensation (or who is filing jointly with a spouse who earns compensation) with the following Modified Adjusted Gross Income (MAGI):

 

• Single filer: Maximum contribution for MAGI up to $105,000 and partial contributions if MAGI is between $105,000 and $120,000 for 2010.
• Joint filer: Maximum contribution for MAGI up to $166,000 and partial contributions if MAGI is between $167,000 and $177,000 for 2010.

 

The phase out range for each subsequent year will be adjusted for inflation.

 

Coverdell Education Savings Account - Anyone can contribute to a Coverdell ESA even the designated beneficiary. There are no requirements for age, income, participation in other plans, or relationship to the beneficiary. There are MAGI limits and they are:

 

• Single filer: Maximum contribution for MAGI up to $95,000 and partial contributions if MAGI is between $95,000 and $110,000. MAGI over $110,000 is not eligible to make a contribution.
• Joint filer: Maximum contribution for MAGI up to $190,000 and partial contributions if MAGI is between $190,000 to $220,000. MAGI over $220,000 is not eligible to make contributions.

How much can I contribute?

Traditional IRA - The amount qualified IRA owners can contribute in tax years 2009 (prior year contributions can be made up to April 15, 2010) and 2010 is $5,000. For owners age 50 and older, an additional catch-up contribution of $1,000 can be made. Contributions can not exceed compensation. Spousal IRA rules allow married couples filing jointly to contribute the maximum amounts to separate IRA’s even if one spouse has little or no earned income.

 

Roth IRA - The amount qualified IRA owners can contribute in tax years 2009 (prior year contributions can be made up to April 15, 2010) and 2010 is $5,000. For owners age 50 and older, an additional catch-up contribution of $1,000 can be made. Contributions can not exceed compensation. The maximum regular Roth contribution is phased out according to income guidelines. For 2010, Single, Head of Household, & Other Unmarried filers is $105,000-$120,000. Married filing Joint is $167,000-$177,000 and Married filling separate is $0-$10,000. Spousal IRA rules allow married couples filing jointly to contribute the maximum amounts to separate IRA’s even if one spouse has little or no earned income.

 

Coverdell Education Savings Account - The total contribution that can be made to a child’s Coverdell ESA can not exceed $2,000. MAGI limits apply.

Who can make Deductible contributions?

Traditional IRA - Contributions are fully deductible for the following IRA owners:

 

• Single individuals not active in an employer retirement plans(regardless of income),
• Single individuals active in an employer retirement plans with MAGI of $56,000 or less with a phase out range between $56,000 and $66,000 for 2010,
• Married couples with neither spouse active in an employer retirement plan (regardless of income),
• Married couples active in an employer retirement plan with MAGI of $89,000 or less with a phase out range between $89,000 and $109,000 for 2010,
• Married individuals not active in an employer retirement plane with spouses who are with MAGI of $167,000 or less with a phase out range between $167,000 and $177,000 for 2010. (If MAGI is within the phase out range a portion of the contribution may be deductible.)

 

Roth IRA -Contributions to Roth IRA’s are non-deductible.

 

Coverdell Education Savings Account - Contributions to Coverdell ESA’s are non-deductible.

What are the tax advantages?

Traditional IRA -

• Earnings grow tax deferred until withdrawn.
• Contributions may be tax-deductible.
  
  

Roth IRA -

• Earnings are tax-deferred and withdrawals are tax-free if the account is open for five tax years and withdrawals are for a qualified reason (age 59 ½, disability, death, or a first-time home purchase).
• Not required to start withdrawals at age 70 ½.

 

Coverdell Education Savings Account -

• Withdrawals for certain qualified education expenses for elementary, secondary, and higher education are tax-free and penalty-free before the beneficiary reaches the age of 30 (except that the age 30 limit does not apply to a special needs beneficiary.)
• A beneficiary can receive tax-free distributions in the same year they claim the Lifetime Learning or HOPE Scholarship tax credits, but the same expenses cannot be used for more than one of these tax benefits.
  

When can I withdraw without restrictions?

Traditional IRA - Withdraw penalty-free for any of the following reasons:

• Qualified higher-education expenses,
• First-time home purchase (Lifetime limit $10,000.00),
• Age 59 ½,
• Disability,
• Qualifying medical expenses exceeding 7.5% of adjusted gross income,
• Payment to beneficiaries upon the owner’s death,
• Payment of health insurance premiums while unemployed for 12 weeks or longer.

 

Roth IRA - Regular contributions can be withdrawn tax-free and penalty-free at any time.

• After the account has been open five tax years, earnings can be withdrawn tax-free and penalty-free for any of these reasons:
• age 59 ½,
• disability,
• death, or
• first time home purchase with a lifetime limit of $10,000.

 

Coverdell education Savings Account -

• Withdrawals are tax-free and penalty-free only for qualified education expenses before the beneficiary reaches 30 years of age.
• Funds can be rolled over from one child’s account to an account for a family member under 30 years of age Except that the age 30 limit does not apply to a special needs beneficiary).

What are the limits for the Saver’s Tax Credit?

The 2010 income limits for Married Filing Jointly are:

• 50% for up to $33,500,
• 20% for $33,501-$36,000,
• 10% for $36,001-$55,500,
• and 0% for over $55,500.

For Head of Household:

• 50% for up to $25,125,
• 20% for $25,126-27,000,
• 10% for $27,001-$41,625,
• and 0% for over $41.

For single filers, married filing separately, and qualifying widow/widowers:

• 50% for up to $16,750,
• 20% for $16751-$18,000,
• 10% for $18,001-$27,750,
• and 0% for over $27,750.

Frequently Asked Questions

• Is my IRA insured?
• When do I have to start taking distributions from my IRA?
• Can I move my retirement plan from work to an IRA?
• Should I open a Traditional IRA or a Roth IRA?
• What’s the penalty for an early withdrawal?
• What is the deadline for opening and IRA?
• Must I contribute to my IRA every year?
• Can I covert my Traditional IRA to a Roth IRA?

 

Is my IRA insured?

Yes. Your IRA’s are insured separately from your other accounts for up to $250,000 by the National Credit Union Administration (NCUA). The NCUA is the federal government regulator and insurer for credit unions.

When do I have to start taking distributions from my IRA?

If you have a Traditional IRA, you must begin receiving required minimum distributions at the age of 70 ½. The minimum distributions each year will be computed using an IRS formula. The first year’s payment may be delayed until April 1st of the following year, but you will receive two years worth of payments in that year. You will owe income tax on any distributions from your Traditional IRA.

 

If you have a Roth IRA, you don not have to take mandatory distributions.

Can I move my retirement plan from work to an IRA?

Any eligible rollover distribution from a qualified retirement plan can be moved into an IRA by using either a rollover or a direct rollover. The administrator of your employer’s QRP is required to tell you when a distribution is an eligible rollover distribution. For a direct rollover, the plan administrator makes the check payable to the credit union. There is no income tax withholding on direct rollovers. For a rollover, the plan administrator makes the check payable to you, and you make a contribution to an IRA within 60 days after you receive the check. Starting in 2008, participants in a pre-taxed QRP can move it into a Roth IRA by directly rolling over the funds. A direct rollover from a pre-taxed QRP to a Roth IRA creates taxable income.

 

Should I open a Traditional IRA or a Roth IRA?

If you want to save on taxes now, choose a Traditional IRA. Traditional IRA’s make sense if you want a tax deduction now or if you think you’ll be in a lower tax bracket when you retire. If you want to save on taxes when you retire, choose a Roth IRA. Roth IRA’s are good if you don’t need the tax break now and offer more flexibility with withdraws.

What’s the penalty if I withdraw before 59 ½ with no exception?

Early withdraws from a Traditional IRA are subject to federal income tax as well as a 10% early distribution tax. For a Roth IRA, earnings distributed before age 59 ½ are subject to the 10% early distribution tax. A distribution of an IRA conversion contribution is also subject to this 10% tax during the first five years after it was made.

What is the deadline for opening an IRA?

You can open or fund your IRA any time until your federal tax return is due. Normally, April 15th of the following year, excluding extensions.

Must I contribute to my IRA every year?

No. You are not required to contribute each year. You can contribute any time and any amount.

Can I convert my Traditional IRA to a Roth IRA?

Yes, anyone who has a traditional IRA or traditional qualified retirement plan can covert money from these plans to a ROTH IRA. For 2010, there are no income limits therefore everybody qualifies for the conversion. There is also a special tax rule that applies to all conversions done in 2010. You have the option of deferring the taxable portion until 2011 and 2012. For example, if you have a Traditional IRA valued at $10,000 and you covert it to a ROTH IRA in 2010 you will not add that amount to your taxable income for 2010. Instead you will add $5,000 (half of the amount) to your taxable income for 2011 and $5,000 (the other half) to your taxable income for 2012.

 

This is not tax advice please consult with a tax professional to determine which IRA is right for you.