Individual Retirement Accounts (IRA)
You can reduce your anxiety about planning for the future by taking a realistic look at your current financial situation. Money is the single biggest concern about retirement for most people, so having a clear picture of your financial goals will go a long way towards putting your mind at ease.
The road to retirement can be a confusing one. Through our alliance with UVEST Financial Services we can help you determine the right product for you, customizing your IRA with mutual funds, stocks, bonds, CDs etc. There are two basic types -- Traditional and Roth.
Traditional IRAs
Anyone under the age of 70½ who has earned income is eligible to contribute to a traditional IRA. Contributions may be tax deductible, depending on your income level and active participation in an employer sponsored retirement plan (see table below).
The potential earnings in these accounts grow tax deferred until you withdraw your funds, at which time they are taxed as regular income. In addition, there may be a 10 percent federal tax penalty if you withdraw funds prior to age 59½.
Traditional IRAs are subject to mandatory distributions that must begin by April 1st of the year after you turn 70½. In succeeding years, minimum annual distributions must be taken no later than December 31. If you don't, you're subject to a 50% federal tax penalty on the amount you should have withdrawn.
If both spouses work, each can contribute the maximum annual contribution limit ($5,000 each or individuals age 50 and up may contribute $6,000 or 100% of their Earned Income in 2010); as long as the amount contributed does not exceed joint earned income. If only one spouse works, a spousal IRA may allow the couple to contribute the maximum amount for each individual, as long as the amount contributed does not exceed earned income.
Tax law changes have affected many people's ability to deduct IRA contributions. Your decision to set up and contribute to an IRA may be influenced by whether or not your contribution is tax deductible.
Roth IRAs
The Roth IRA is a nondeductible IRA that allows the opportunity for tax-free earnings accumulation and withdrawals. Unlike traditional IRA distributions, qualified distributions from Roth IRAs are not included in gross income. You can also contribute past age 70½, and you do not have to begin taking minimum withdrawals due to age.
To qualify for a tax-free and penalty-free withdrawal from a Roth IRA at retirement (after age 59½), a distribution of interest can only be made after a five-year holding period. In addition, a qualified distribution can be made before age 59½and after five years, due to death or disability or for the first-time homebuyer expenses (up to a $10,000 lifetime cap). Eligibility to contribute to a Roth IRA phase out at higher modified gross income levels.
