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officeProgar & Company, P.A.
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Overview of various types of IRAs available (MS Word)
Overview of various types of IRAs available (.pdf)
Overview of various types of IRAs available
Dear Reader:
At one time, there was relatively little confusion about IRAs
because there was only one type available. Now, however, IRAs have
proliferated—there's the regular IRA, which may be funded with
deductible and/or nondeductible contributions, Roth IRA, SEP-IRA,
and SIMPLE IRA. Some of these IRAs are similar, but others have
little in common. To compound the confusion, some IRAs are known by
different names. For example, a non-Roth retirement-savings IRA
sometimes is called a traditional IRA.
What do all these IRAs have in common? They can help you and your
family save significant amounts for retirement on a tax-favored
basis. Here's an overview of the different types of IRAs available
today.
Traditional IRAs
Traditional IRAs can be funded with deductible and nondeductible
contributions.
Deductible IRA contributions.
You can make an annual deductible contribution to an IRA if:
(1) you (and your spouse) are not an active participant in an
employer-sponsored retirement plan, or
(2) you (or your spouse) are an active participant in an employer
plan, and your modified adjusted gross income (AGI) doesn't exceed
certain levels that vary from year-to-year by filing status.
For example, in 2009, if you are a joint return filer covered by an
employer plan, your deductible IRA contribution phases out over
$89,000 to $109,000 of modified AGI. If you're single or a head of
household in 2009, the phaseout range is $55,000 to $65,000. For a
married filing separately, the phaseout range is $0 to $10,000 (for
all years). In 2009, if you are not an active participant in an
employer-sponsored retirement plan, but your spouse is, your
deductible IRA contribution phases out with modified AGI of between
$166,000 and $176,000.
Deductible IRA contributions reduce your current tax bill, and
earnings within the IRA are tax-deferred. However, every dollar you
take out is taxed in full (and subject to a 10% penalty if you
withdraw money before age 591/2,
unless one of several exceptions apply). You must begin making
minimum withdrawals by April 1 of the year following the year you
attain age 701/2.
Nondeductible IRA contributions.
You can make an annual nondeductible IRA contribution without regard
to your coverage by an employer plan and without regard to your AGI.
The earnings in a nondeductible IRA are tax-deferred within the IRA,
but are taxed on distribution (and subject to a 10% penalty if you
withdraw money before age 591/2,
unless one of several exceptions apply).
You must begin making minimum withdrawals by April 1 of the year
following the year you attain age 701/2.
Nondeductible contributions aren't taxed when they are withdrawn. If
you've made deductible and nondeductible IRA contributions, a
portion of each IRA distribution is treated as coming from
nontaxable IRA contributions (and the rest is taxed).
If you can't make a deductible contribution to a traditional IRA,
you should contribute (if eligible) to a Roth IRA instead of making
a nondeductible contribution to a traditional IRA. That's because
the Roth IRA offers a better package of tax benefits than you'd get
by making a nondeductible contribution to a traditional IRA.
Deductible and nondeductible IRA limits.
The maximum annual IRA contribution (deductible or nondeductible, or
a combination) is $5,000 for 2009 ($6,000 if you are age 50 or over
in 2009). Additionally, your IRA contribution for a year (deductible
or not) can't exceed the amount of your compensation includible in
income for that year. Deductible and nondeductible IRA contributions
can't be made once you attain age 701/2.
IRAs often are referred to as “traditional IRAs” (or “regular IRAs”)
to distinguish them from Roth IRAs.
Roth IRAs.
You can make an annual contribution to a Roth IRA if your AGI
doesn't exceed certain levels that vary by filing status. For
example, in 2009, if you are a joint return filer, the maximum
annual Roth IRA contribution phases out between $166,000 and
$176,000 of modified AGI ($105,000 to $120,000 for single
taxpayers). Annual contributions to Roth IRAs can be made up to the
amount that would be allowed as a contribution to a traditional IRA,
reduced by the amount you contribute for the year to non-Roth IRAs,
but not reduced by contributions to a SEP IRA or SIMPLE IRA (see
below). For example, if you don't contribute to a traditional IRA in
2009, you can contribute up to $5,000 to a Roth IRA for that year
($6,000 if you are age 50 or older in 2009).
Roth IRA contributions aren't deductible. However, earnings are
tax-deferred within the Roth IRA and (unlike a traditional IRA) are
tax-free if paid out (1) after a five-year period that begins with
the first year for which you made a contribution to a Roth IRA, and
(2) once you reach age 591/2,
or upon death or disability, or (up to $10,000 lifetime) for
first-time home-buyer expenses of you, your spouse, child,
grandchild, or ancestor. And if a Roth IRA payout doesn't meet these
dual conditions, you're treated as first withdrawing nontaxable Roth
IRA contributions; the balance (representing earnings) is taxed and
is subject to a 10% penalty for pre-age-591/2
withdrawals, unless one of several exceptions apply. Thus, for
example, if you contribute $6,000 over the years to Roth IRAs and
withdraw $9,000 at age 55 to buy a boat, only $3,000 is taxed (and
is subject to the 10% penalty).
You can make Roth IRA contributions even after you attain age 701/2
(if you have sufficient compensation income), and you do not have to
take minimum distributions from a Roth IRA after you attain that
age. That makes Roth IRAs an excellent wealth-building vehicle for
your family.
You can “roll over” (or convert) a traditional IRA to a Roth IRA in
a year that your AGI, as specially computed, doesn't exceed
$100,000, but the amount taken out of the traditional IRA is treated
for tax purposes as a regular withdrawal (but it's not subject to
the 10% early withdrawal penalty). (Beginning in 2010, the $100,000
AGI ceiling on conversions from a traditional IRA to a Roth IRA will
be removed.)
SEP IRAs and SIMPLE IRAs
Small businesses that want to provide employees with a retirement
plan, but keep administrative costs low, may be able to set up a SEP
(simplified employee pension) or SIMPLE (savings incentive match
plan for employees) plan. In either type of plan, contributions are
made to IRA-type accounts in the employees' names. Annual
contributions to these plans are controlled by special rules and
aren't tied to the normal IRA contribution limits. Distributions
from a SEP IRA or SIMPLE IRA are subject to tax rules similar to
those that apply to deductible IRAs.
Income tax credit for contributions to IRAs
If your adjusted gross income doesn't exceed specified levels, you
may be entitled to a credit (saver's credit) against your income tax
equal to a percentage of your contribution to any of the above IRAs.
If you are entitled to the credit, you get it in addition to any
deduction you may be entitled to for the same contribution.
Please call our office for more information on how you and your
family may be able to benefit from IRAs in all their various forms.