Traditional IRAs
What is a traditional IRA?
A. A traditional IRA is a type of retirement plan that has
been in existence since 1975. Traditional IRAs offer tax-deferred
earnings and the possibility for tax-deductible contributions.
These tax advantages make the traditional IRA a powerful tool
in creating a balanced, long-term savings plan.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
How does a traditional IRA work?
A. You can contribute to a traditional IRA if you earn compensation
and you will not reach age 70 1/2 by the end of the year.
If you file a joint tax return, you can treat your spouse’s
compensation as your own (except your combined contributions
cannot exceed your combined compensation or contribution limit,
whichever is less). All earnings in a traditional IRA are
not taxed until they are withdrawn. The ability to defer taxes
on the earnings, and to withdraw in a year when you may be
in a lower tax bracket, can mean more after-tax dollars for
your retirement.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
How much can I contribute to a traditional
IRA?
A. If you meet the eligibility tests described above and you
are under age 50, you can contribute up to $4,000 for 2006
and 2007. In 2008, the annual contribution limit is $5,000.
For owners age 50 and older, your limits increase to $5,000
for 2006 and 2007 and $6,000 for 2008.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Can I still contribute to a traditional
IRA if I participate in an employer-sponsored retirement plan?
A. Yes, your participation in an employer-sponsored retirement
plan will not affect your ability to contribute to a traditional
IRA (assuming age and compensation requirements are met).
However, higher-income earners will lose their ability to
deduct their traditional IRA contributions if participating
in an employer-sponsored plan.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
If I already have a Roth IRA, can I have
a traditional IRA, too?
A. Yes, you can. However, the limits on annual contributions
described above apply to any combination of traditional and
Roth IRA contributions that you make for the year.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What about income taxes when I withdraw
from my traditional IRA?
A. You will owe income taxes when you withdraw from your traditional
IRA. However, if you make nondeductible contributions to a
traditional IRA, a portion of each withdrawal will be treated
as the nontaxable return of these contributions.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
If I make an early withdrawal from my
traditional IRA before age 59 1/2, do I pay a penalty?
A. In general, you must pay a ten percent tax on early distributions
or withdrawals before age 59 1/2. But the early distribution
tax does not apply in the following situations:
a) Amount is rolled over or directly transferred to another
traditional IRA
b) Amount is properly converted to a Roth IRA
c) Withdrawal of an excess contribution before the tax return
is due
d) Withdrawal of an excess contribution after the filing deadline
if certain conditions are met
e) Payment is made to your beneficiaries after your death
f) Withdrawal of up to $10,000 is for first-time home purchase
g) Amount is used to pay for qualified postsecondary education
expenses
h) Amount is used to pay for medical expenses in excess of
7.5% of adjusted gross income (AGI)
i) Amount is for pre-59 1/2 periodic payments
j) Distribution is to an owner who is disabled (as defined
by the IRS code)
k) Distribution is for medical insurance premiums during unemployment
that lasts 12 weeks or longer
This article is not intended as tax advice. Contact a tax
professional.
Back to top
When must I begin taking distributions
from my traditional IRA?
A. You must begin taking required minimum distributions from
your traditional IRA at age 70 1/2. The minimum distributions
each year will be computed using an IRS formula. You are allowed
to delay the first year’s payment until April 1 of the
following year, but you will receive two years’ worth
of payments in your 71 1/2 year if you choose to delay.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Can I move funds from a qualified retirement
plan to a traditional IRA?
A. If you are entitled to receive an eligible rollover distribution
from an employer’s plan, you can continue deferring
taxes by moving the money into a traditional IRA. The best
way to do this is to inform the plan administrator that you
want the funds moved directly to your traditional IRA in a
direct rollover. The plan administrator will inform you before
making an eligible rollover distribution.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Can I move money from a traditional
IRA to a Roth IRA?
A. You can move money from your traditional IRA to a Roth
IRA if your adjusted gross income for the year is $100,000
or less, and you are either single, or married and filing
a joint tax return. In the year you convert, you will have
to pay federal income taxes on the amount that you move, except
the portion that is treated as the return of your traditional
IRA basis. You may also be subject to state income taxes.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What happens to my traditional IRA
after my death?
A. You may designate one or more beneficiaries to receive
your IRA after your death. If your spouse is your beneficiary,
he or she may directly transfer your traditional IRA to his
or her own IRA tax-free. In addition, all beneficiaries have
the option of taking a lump-sum payment or periodic payments
over a number of years. Any tax-deferred money in your traditional
IRA at the time of death will be taxed when it is distributed
to your beneficiaries.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
ROTH IRAs
What is a Roth IRA?
A. A Roth IRA is an individual retirement account created
by the Taxpayer Relief Act of 1997. Named for former Senate
Finance Committee Chairman William Roth, Jr., this IRA offers
more incentives to boost your retirement savings, as well
as more ways to use your nest egg.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
How does a Roth IRA work?
A. Unlike traditional IRAs, contributions to a Roth IRA are
never tax-deductible. However, the money in your Roth IRA,
including earnings, can be withdrawn tax-free. Of course,
you must conform to the plan provisions to get this tax-free
advantage.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Am I eligible to contribute to a Roth
IRA?
A. You are eligible if you earn compensation and your income
is less than limits set by Congress. A single filer who has
modified adjusted gross income (MAGI) up to $95,000 can make
the full Roth IRA contribution for that year. Each spouse
filing a joint federal income tax return showing a MAGI up
to $150,000 can make the full Roth IRA contribution for that
year. Some people with higher MAGI may be able to make smaller
contributions.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
How much can I contribute to a Roth
IRA?
A. If you meet the eligibility tests described above and you
are under age 50, you can contribute up to $4,000 for 2006
and 2007. In 2008, the annual contribution limit is $5,000.
For owners age 50 and older, your limits increase to $5,000
for 2006 and 2007 and $6,000 for 2008.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What happens if my (our) income is too
high to make a full contribution to a Roth IRA?
A. A smaller contribution can be made if your MAGI is between
$95,000 and $110,000 for single filers, and between $150,000
and $160,000 for joint filers. When income exceeds $110,000
for single filers and $160,000 for joint filers, a regular
Roth IRA contribution cannot be made for that year.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Can I still contribute to a Roth IRA
if I participate in an employer-sponsored retirement plan?
A. Yes, and you can contribute past age 70½, as long
as you continue to earn compensation.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Will my Roth IRA affect the amount that
I can contribute to my employer-sponsored retirement plan?
A. No. The amount you contribute to your 401(k) or other employer-sponsored
plans will not be affected by your Roth IRA. However, you
must conform to the plan contribution limits for your employer-sponsored
plan.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Can I have both a traditional and a
Roth IRA?
A. Yes, you can maintain both types of IRAs at the same time.
You can even make contributions to both types of IRAs in the
same year. But your contributions to both Roth and traditional
IRAs cannot exceed the maximum contribution.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
When can I start taking tax-free distributions
from my Roth IRA?
A. You can withdraw most contributions without paying income
tax at any time. Distributions are treated as first being
attributable to your contributions until all of your contributions
have been distributed.
There are two requirements to qualify for tax-free withdrawals
of the income your Roth IRA has earned. First, your Roth IRA
must meet the “five-year test.” In other words,
it must be five years after the first year for which Roth
contributions were made. Second, one of the following conditions
must apply:
(a) You are over age 59½
(b) Funds are going to your beneficiary upon your death
(c) You have become disabled
(d) You are using the funds for a first-time home purchase
(lifetime limit is $10,000 per person).
If you have made a conversion contribution, please read further
for taxation issues regarding conversions.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Do I have to take minimum distributions
when I reach age 70½?
A. No. The Roth IRA is more flexible than a traditional IRA
because you are not required to start taking minimum distributions
when you reach age 70½. If you don’t need the
cash, you can let your money continue to grow tax-free for
as long as you like. However, minimum distributions must be
made to your beneficiaries following your death.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Coverdell Education Savings Accounts
What is a Coverdell Education Savings
Account (ESA)?
A. The Taxpayer Relief Act of 1997 created the Education IRA,
now known as the Coverdell ESA. Its sole purpose is to help
you pay for your child’s education expenses, such as
tuition, fees, books, supplies, equipment, and in some cases,
room and board and computers. These options were improved
by the Economic Growth and Tax Relief Reconciliation Act of
2001.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What is the deadline for making a Coverdell
ESA contribution?
A. The deadline for making a Coverdell ESA contribution is
the tax return deadline for the year for which the contribution
is being made (usually April 15 of the following calendar
year) not including extensions.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
How does a Coverdell ESA work?
A. Unlike traditional IRAs, contributions to a Coverdell ESA
are never tax-deductible. However, a Coverdell ESA offers
you the potential for tax-free withdrawals – including
earnings.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What is the most I can contribute
to a Coverdell ESA?
A. The total contributions each year to each child’s
Coverdell ESA cannot exceed $2,000. If you’re eligible,
you can contribute the full amount for each child. For example,
if you have three children and each has his or her own Coverdell
ESA, you can contribute $6,000 ($2,000 to each ESA).
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Who is eligible to open and contribute
the full amount to a Coverdell ESA?
A. You can contribute the full amount if you are a:
• Single filer with modified adjusted gross income (MAGI)
up to $95,000
• Joint filer with MAGI up to $190,000
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What happens if my (our) income is too
high to make the full contribution to a Coverdell ESA?
A. You can make contributions of less than the full amount
if you are a:
• Single filer with MAGI between $95,000 and $110,000
• Joint filer with MAGI between $190,000 and $220,000
If your income exceeds these amounts, you cannot make a regular
Coverdell ESA contribution for that year.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
How long can I contribute to the account?
A. You can make contributions to a child’s Coverdell
ESA until he or she reaches the age of 18. This age limit
does not apply to special needs beneficiaries. This is a person
who requires additional time to complete his or her education
because of a physical, mental or emotional condition (including
a learning disability).
This article is not intended as tax advice. Contact a tax
professional.
Back to top
As a parent, am I the only one who can
open and contribute to a Coverdell ESA for my child?
A. No. Anybody who meets the income requirements can open
and contribute to your child’s Coverdell ESA. This includes
grandparents, aunts and uncles, family friends and anyone
else who wants to pitch in to your child’s education
fund. Corporations, tax-exempt organizations and other entities
can also make Coverdell ESA contributions, and there are no
income limits on these contributors. However, the total annual
contributions to all Coverdell ESAs for each child can’t
exceed $2,000.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Who controls the account?
A. Every Coverdell ESA must have one, and only one, “responsible
individual” to oversee the account. This person decides
when funds will be withdrawn and if and when funds will be
rolled over to the Coverdell ESA of a family member. You can
be the “responsible individual” as long as you
are a parent or legal guardian of the child. The child can
serve as the responsible individual after becoming an adult.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
When can I withdraw funds from a Coverdell
ESA?
A. As the responsible individual, you can withdraw funds at
any time. However, to avoid tax consequences from the withdrawal,
you must use the funds to pay for qualified education expenses
for your child (the ESA’s designated beneficiary) before
he or she reaches age 30 (except that the age 30 limit does
not apply to a special needs beneficiary).
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What educational expenses are considered
to be “qualified”?
A. Qualified expenses include tuition, fees, books, supplies,
and equipment required for enrollment or attendance at nearly
any post-secondary educational institution (public, nonprofit
or proprietary). Certain room and board expenses also may
qualify. Qualified expenses also include these same expenses
for elementary and secondary education, and the purchase of
computer technology or equipment that is used by the beneficiary
and the beneficiary’s family while the beneficiary is
in school.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What happens if my child doesn’t
use the funds?
A. If your child (the designated beneficiary of the ESA) decides
not to go to college or leaves school before all the funds
are withdrawn, you can roll unused funds into the Coverdell
ESA of another child in your family. The beneficiary of the
Coverdell ESA who receives the unused funds must be under
the age of 30 (except that the age 30 limit does not apply
to a special needs beneficiary).
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Who is considered a family member for
the purposes of a rollover?
A. Family members of the designated beneficiary who are eligible
to receive unused funds include (but are not limited to) spouses,
siblings, stepsiblings, nieces, nephews, parents, aunts, uncles,
grandparents, children and grandchildren. Of course, some
of these categories will be eliminated immediately, since
the new designated beneficiary must be under the age of 30
at the time of the rollover (except that the age 30 limit
does not apply to a special needs beneficiary).
This article is not intended as tax advice. Contact a tax
professional.
Back to top
What if my child earns an academic scholarship
and the tuition is waived?
A. The amount of scholarship money your child receives is
deducted from the allowable expenses for the Coverdell ESA.
For example, if qualified expenses total $6,000 and your child
receives a scholarship for $3,000, you can make a qualified
withdrawal of $3,000 from the Coverdell ESA. Remember that
unused funds can always be rolled over into the Coverdell
ESA of a family member.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Can I roll funds from a traditional
or Roth IRA into a Coverdell ESA?
A. No, rollovers from a traditional or Roth IRA into a Coverdell
ESA are not allowed.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
How does the Coverdell ESA affect other
education savings incentives?
A. Contributions can be made on behalf of the same child to
both a Coverdell ESA and a qualified tuition (section 529)
plan. A person can also receive tax-free distributions from
a Coverdell ESA in the same year he or she claims the Lifetime
Learning or HOPE Scholarship tax credits, but the same expenses
cannot be used for more than one of these tax benefits.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
If I contribute to a Coverdell ESA,
can I still contribute to a traditional or Roth IRA?
A. Contributions to traditional or Roth IRAs have no effect
on the contributions you can make to each Coverdell ESA.
This article is not intended as tax advice. Contact a tax
professional.
Back to top
Don’t traditional and Roth IRAs
allow me to withdraw funds for education expenses?
A. Traditional and Roth IRAs do offer penalty-free withdrawals
for qualified higher-education expenses, but you may still
need to pay taxes on those withdrawals. In contrast, withdrawals
from a Coverdell ESA are both tax-free and penalty-free if
used for qualified education expenses.
This article is not intended as tax advice. Contact a tax
professional.
Back to top | 
