IRA Basics
What’s the difference between a Roth
and traditional IRA?
With a traditional IRA, your contributions
may be tax-deductible and earnings are
tax-deferred, meaning you pay taxes on most
IRA funds upon withdrawal. In contrast, Roth
IRA contributions are always made with
after-tax dollars, but qualified withdrawals
are tax-free — including all your earnings!*
As for similarities, the aggregate
contribution limit to either a Roth or
traditional IRA is $4,000 per year, or 100%
of your compensation (whichever is less).
And both offer the flexibility to use the
funds not only for retirement, but also for
a first-time home purchase and
higher-education expenses.
*Some withdrawals from
traditional or Roth IRAs may be subject to
additional penalties if they are taken
improperly or at the wrong time. Please
consult your tax adviser for additional
information. Can I contribute to
an IRA if I already have a retirement plan
through my employer?
Yes, you can contribute to a Roth IRA,
traditional IRA or Coverdell Education
Savings Account (ESA) regardless of whether
or not you have an employer-sponsored plan.
In fact, IRAs are a great way to pad your
savings.
Have the eligibility rules changed for
Roth and traditional IRAs?
No. Despite all the changes to traditional
and Roth IRA contribution limits due to
recent tax legislation, the eligibility
requirements are exactly the same. For
either IRA, you must earn compensation or
file a joint income tax return with a spouse
who earns compensation. If you want to
contribute to a traditional IRA, the only
additional requirement is that you’re under
age 70½ (although your income may affect
whether or not your contributions are
tax-deductible).
To contribute to a Roth IRA, you must
fall within certain income limits: a
modified adjusted gross income (MAGI) of up
to $110,000 if you file a single tax return
and a MAGI of up to $160,000 if you file
jointly. Note that you’ll only be able to
contribute the $4,000 maximum to a Roth IRA
if your income is under $95,000 as a single
filer or under $150,000 as a joint filer
(above that, contributions are phased out).
I’m leaving my job. Can I roll my
457(b) plan into an IRA?
Yes – if it is a governmental 457(b) plan.
You can also roll funds from 403(b)s and
qualified retirement plans (QRPs) — including 401(k)s —
into an IRA. Or you can
roll the plan assets from any of these plans
into each other. Likewise, IRA distributions
will be eligible for rollover to QRPs,
457(b)s or 403(b)s.*
All of this is good news if you’re
receiving plan distributions due to a job
change or retirement. It means more
investment options and more payment options
for your plan assets. And if you do a direct
rollover (where the check is made out to
your financial institution on behalf of the
IRA), your funds won’t be subject to taxes
or penalties.
*The receiving plan must
have terms that allow for a rollover to
occur; some plans do not accept rollovers.
Who is eligible for the nonrefundable
tax credit for making IRA contributions?
You qualify for a nonrefundable tax credit
for contributions you make to your IRA if
you are a:
- Single filer with a modified
adjusted gross income (MAGI) of $25,000
or less; or
- Head of household filer with MAGI of
$37,500 or less; or
- Joint filer with MAGI of $50,000 or
less.
The credit ranges from 0 - 50% of
your contribution, depending on your
MAGI, and the maximum annual
contribution eligible for the credit is
$2,000. This credit is in addition to
any applicable deduction or exclusion.
If you’re under age 18, a full-time
student, or claimed as a dependent on
another person's tax return, you will
not be eligible for the credit.
What’s a SEP plan?
A simplified employee pension (SEP) plan
is exactly that — a simpler way for
small businesses to offer a retirement
plan to their employees. A SEP plan
allows you, the employer, to make
contributions to your own traditional
IRA and those of your employees instead
of establishing a complex retirement
plan. SEP plans are inexpensive and easy
to administer. Plus, your employees pay
no taxes on their SEP accounts until
they withdraw their funds.
Can my spouse and I both
contribute to IRAs?
If you and your spouse want to put money
into traditional or Roth IRAs, your
contributions can total $6,000 or your
combined compensation, whichever is
less. But the maximum contribution for
each spouse can’t exceed $4,000 per
year, so each spouse will need a
separate IRA to contribute the full
$6,000. If you don’t earn compensation,
but your spouse does, you still may be
eligible to contribute to a traditional
or Roth IRA based on your spouse’s
earnings.
Keep in mind that you must earn under
$95,000 on a single tax return and under
$150,000 on a joint tax return in order
to contribute the full $4,000 to a Roth
IRA. You can still make partial
contributions to a Roth with income up
to $110,000 as a single filer and
$160,000 as a joint filer. While there’s
no age limit on contributions to Roth
IRAs, you can’t contribute to a
traditional IRA for the year you reach
age 70½ or later years. Also, there are
some limitations on tax-deductible
contributions to traditional IRAs.
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