What's the difference between a traditional IRA and a Roth IRA? Contributions to a traditional IRA are usually made with before-tax dollars, but you can contribute after-tax money as well. Your contributions may be tax-deductible, and your earnings are tax-deferred. You pay taxes on most traditional IRA funds when you withdraw them. Contributions to a Roth IRA are always made with after-tax dollars. Qualified withdrawals, including earnings are tax-free.
Can I convert a traditional IRA to a Roth IRA? Yes, but it would be a good idea to consult with a tax professional before you make the move. The big advantage is the tax-free earning potential and tax-free distribution of a Roth IRA.
Is there an age limit when I must start withdrawing money from my Roth IRA? No. Unlike a traditional IRA, which requires you to stop contributing and begin withdrawals at age 70 ½, a Roth IRA has no such rule. As long as you are still earning compensation, and you are under the income limits, you can keep contributing to your Roth IRA.
The obvious advantage is that a Roth IRA allows you to continue creating savings for your retirement. Another big plus - you can plan your Roth IRA as a tax-free inheritance gift to your heirs.
Are Individual Retire Accounts only for retirement? No. There is great flexibility in the benefits of IRA funding. You can use your IRA to pay for higher education, certain medical expenses, health insurance premiums, help with purchasing your first home and more. If you have a Roth IRA, you can withdraw your regular contributions tax-free and penalty-free at any time and for any reason.
Why should I have my IRA at my credit union? You want to benefit through the tax advantages of an IRA. You also want to know that your accounts are secure, and in a financial institution that is dedicated to providing professional financial services combined with credit union philosophy.
Your IRA is the key to a comfortable retirement, so it should be trusted to the guidance and management of experienced professionals. The credit union can answer many of your IRA questions and provide the convenience of a wide range of related financial services.
A credit union IRA offers you the safety of insured deposits, competitive rates, low or no annual maintenance fees, the convenience of payroll deduction, low minimum deposit requirements, and the personal service that credit unions are know for.
In addition to an IRA, can I save extra money for college funding? Yes. You can put $2,000 per child per year into a Coverdell Education Savings Account (ESA). You can also invest in a 529 state college savings plan in the same year.
Contributions (which are not tax-deductible) can be made until the child is 18. The money can be used for qualified higher education and K-12 primary and secondary education expenses for tuition, fees, room and board, uniforms, transportation, extended day care, and even computers.
The beneficiary can receive tax-free distributions from a Coverdell ESA in the same year as receiving tax credits for Lifetime Learning or a HOPE Scholarship.
You are eligible to contribute the $2,000 maximum to a Coverdell ESA if you are a joint tax filer with income under $190,000, or a single tax filer with income under $95,000. If you have a higher income level, you may be able to make smaller contributions. The deadline for contributing to a Coverdell ESA is the same as the federal tax deadline, usually April 15.
If I leave my job or retire, can I move my retirement plan benefits into an IRA? Yes. The best way to accomplish this is to use a direct rollover. Under this approach you ask the administrator of your retirement plan to send the funds directly to the credit union for the benefit of your IRA. The funds are not subject to any taxes or even withholding when a direct rollover is used.
You can roll over funds from any qualified retirement plan, including a 401(k), a government 457(b) or a 403(b) plan. Assets from any of these plans can also be rolled into each other if the receiving plan allows a rollover to take place.
IRA Contribution FAQs
What are the IRA contribution limits? For tax years 2005 through 2007, annual contribution limit is $4,000, and it increases to $5,000 for tax years 2008 to 2010. The annual contribution limit returns to $2,000 in 2011 and thereafter.
Individuals who have reached age 50 by December 31 have a higher contribution limit. For tax years 2003 through 2005, this limit increased by $500. From 2006 through 2010, the limit increases by $1,000. Older individuals do not have a higher annual contribution limit in 2011 and thereafter.
You can also save up to $2,000 per child per year in after-tax dollars in a Coverdell Education Savings Account (ESA).
Why should I consider contributing the maximum amount to my IRA? You can contribute any amount up to the maximum limit. But the highest allowable contribution could make a big difference in your retirement funding.
For example: If you contribute $3,000 instead of $2,000 each year from 2003 through 2010, and your IRA earns a 5% return, you'd have an additional $10,000 more in eight years (the contribution limit will revert back to $2,000 after 2011 unless Congress acts to extend it).
Do I have to make a lump sum IRA contribution each year? You can, but it might be a better idea to spread out your IRA contributions through payroll deduction at the credit union.
What determines if I'm eligible to contribute to an IRA? Most people can contribute to an IRA if they earn compensation or are filing jointly with spouse who earns compensation.
Can my spouse and I both contribute to an IRA? Yes. The maximum contribution for each of you cannot be more than the annual contribution limit or the amount of your compensation whichever is less. You will need your own IRA (joint IRAs are not allowed by tax laws). If you don't earn compensation but your spouse does, you may be eligible to contribute to an IRA based on your spouse's earnings.
However, the income rules still apply for a Roth IRA. Your modified adjusted gross income (MAGI) can't be over $150,000 as a joint tax filer. You can make smaller contributions with a MAGI up to $160,000 as a joint tax filer.
For a traditional IRA, you can't make contributions for the year during which you reach age 70 ½ or thereafter. Also, if you or your spouse participates in a qualified retirement plan, your deduction of regular contributions is subject to income limits.
Can I contribute to both a traditional and Roth IRA? Yes. But the total of the contributions to traditional and Roth IRAs cannot exceed your compensation or the annual contribution limit, whichever is less. However, you can make an annual contribution of $2,000 to a Coverdell Education Savings Account (ESA), in addition to your IRA contributions.
What are IRA "catch up" contributions? These are special increases in the annual contribution limits for people who have reached the age of 50 by December 31. For these people, the annual contribution limit is increased by $500 for the2003 through 2005 tax years, and it is increased by $1,000 for the 2006 through 2010 tax years.
Can I contribute to an IRA if I have a retirement plan with my employer? Yes. You can still contribute to a traditional or Roth IRA or to a Coverdell Education Savings Account (ESA). Your participation in your employer's retirement plan doesn't change how much you can contribute to an IRA. However, it could affect your eligibility for deducting your contributions to a traditional IRA on your tax return.
As long as you are under age 70 ½ and earning compensation, you can make non-deductible contributions to a traditional IRA and take advantage of the tax-deferred earnings on your account.