| | Traditional Deductible | Traditional Non-Deductible | Roth | Coverdell Education Savings Account |
| Tax Benefits |
Tax-deductible contributions and tax-deferred earnings. |
Tax-deferred earnings. |
Tax-deferred earnings and qualified tax-free distributions. |
Tax-deferred earnings and qualified tax-free distributions. |
| Eligibility |
Individual with earned income (and non-working spouse) under age 701⁄2, subject to income limits below. |
Individual with earned income (and non-working spouse) under age 70 1/2, regardless of plan participation or income. |
Individual with earned income (and non-working spouse) regardless of plan participation or age. 2009 contributions are phased out for MAGI of:
- Single: $105,000-$120,000
- Joint: $166,000– $176,000
- Separate: $0– $10,000
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Tax-deferred earnings and qualified tax-free distributions. |
| Deduction of Contributions (2009 limits) |
Individual and spouse not covered by plan at work, full deduction regardless of income. Individual with plan — 2009 deduction limits phased out for MAGI of:
- Single: $55,000–$65,000
- Joint: $89,000–$109,000
- Separate: $0–$10,000
Individual without plan/spouse with plan —deduction limits phasedout for MAGI of:
- Joint: $166,000-$176,000
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Contributions are not deductible. |
Contributions are not deductible. |
Contributions are not deductible. |
| Annual Contributions (2009 limits) |
Lesser of 100 percent of earned income or $5,000 (for each spouse). Aggregated with other IRA contributions (Traditional and Roth).
Catch-Up Contributions: IRA holders age 50 & older may contribute $1,000 in excess of the basic annual contribution. |
Same as Traditional Deductible. |
Same as Traditional Deductible. |
$2,000 per child until they reach 18. Aggregated with other Coverdell Education Savings Accounts. Contributions to Coverdell Education Savings Account can be made:
- For children over 18 with certain special needs
- In addition to contributions to 529 plans
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| Rollover Contributions and Conversions |
Eligible distributions from another Traditional IRA, SEP IRA, qualified plans (401(k), 403(b), 457 plans) or SIMPLE IRA (after two years). No taxes until withdrawn from IRA. |
Same as Traditional Deductible |
If MAGI < $100,000 and not married filing separately, can convert Traditional, SEP and (after two years) SIMPLE IRA to Roth. Ordinary income tax (no 10 percent penalty) on taxable amounts converted. Eligible distribution from a qualified plan may be converted directly to a Roth IRA. Also, can roll over from another Roth IRA. |
Distributions from another Coverdell Education Savings Account (Ed IRA) for same child or certain family members’ Education Savings Accounts. |
Mandatory
Distributions |
Age 701⁄2 or death. |
Same as Traditional Deductible |
None during lifetime. Beneficiary (except spouse) must begin the year following the IRA owner’s death. |
Age 30 or death. |
Taxes on
Distributions |
Ordinary income. 10 percent penalty before age 591⁄2 unless due to death, disability, Substantially Equal Periodic Payments (SEPP), eligible medical expenses, certain unemployed individuals’ health insurance premiums, limited “first time” home purchase ($10,000 lifetime maximum), qualified higher education expenses, qualified reservist, Roth conversions or IRS levy. |
Each distribution partially taxable. Ordinary income on taxable portion. Distributions subject to same 10 percent penalty tax and exceptions as deductible IRA. |
Qualified distributions of contributions from a Roth IRA are generally tax-free and penalty-free. Distributions of earnings are tax-free and penalty-free after five years and age 591⁄2. If earnings are taken earlier, they are subject to ordinary income tax and a 10 percent penalty, with the same exceptions as a Traditional Deductible IRA. |
Tax-free if used for qualified education expenses before age 30. Otherwise, earnings subject to ordinary income tax plus 10 percent penalty tax. Limited exceptions may apply to 10 percent tax. |
Roth Conversions
Converting your existing Traditional IRA to a Roth IRA may help you maximize your tax-free wealth-building opportunities. If your Modified Adjusted Gross Income (MAGI) is $100,000 or less (married filing jointly or single — not available if you are married and filing separately), you qualify for a Roth conversion.
You can convert your existing Traditional, SEP and (after two years) SIMPLE IRAs by paying the ordinary income tax (but no penalty) on the amounts you would like to reposition as a Roth IRA. Such a conversion will result in potentially income-tax-free distributions and inheritance.
Effective in 2008, company plan balances can be converted to Roth IRAs if you meet MAGI conversion eligibility. These conversions can be made through a direct rollover of before-tax and/or after-tax money from the plan to the ex-employee’s Roth IRA, or an amount can be distributed from the plan and rolled over to the Roth IRA within 60 days. A Roth conversion of after-tax amounts will not be taxable income. Any pre-tax amount converted will be included in the IRA holder’s gross income for the year. In any case the amount rolled over must be an eligible rollover distribution.
A non-spouse beneficiary who inherits a Qualified Retirement Plan may be eligible to make a direct trustee to-trustee transfer to an Inherited Roth IRA, provided the MAGI rules for a Roth conversion are met and the plan allows the transfer. These conversions can be made through a direct rollover of before-tax and/or after-tax money from the plan to the beneficiary’s Inherited Roth IRA. A Roth conversion of after-tax amounts will not be
taxable income. Any pre-tax amount converted will be included in the Inherited Roth IRA holder’s gross income for the year. Remember, you still have to take RMDs each year from your Inherited Roth IRA. If you have an Inherited Traditional and Inherited Roth IRA, RMDs must be taken from both accounts.
A surviving spouse inheriting their deceased spouse’s Qualified Retirement Plan also has the option to convert to a Roth or Inherited Roth IRA provided the MAGI rules for a Roth conversion are met and the plan allows the transfer. These conversions can be made through a direct rollover of before-tax and/or after-tax money from the plan to the surviving spouse’s Roth or Inherited Roth IRA. A Roth conversion of after-tax amounts will not be taxable income. Any pre-tax amount converted will be included in the Inherited Roth IRA holder’s gross income for the year.
If you pay the taxes due on the conversion from your current income or savings, not from the IRA itself, you will maximize the benefit of the tax-free earnings potential. Distributions from a Roth IRA conversion, prior to the expiration of a five-year holding period or attainment of age 591⁄2 (beginning with the year of conversion), are subject to a 10 percent penalty, unless one of the following exceptions applies.
Exceptions to the 10 percent early distribution penalty: death, disability, Substantially Equal Periodic Payments (SEPP), eligible medical expenses, certain unemployed individuals’ health premiums, limited “first time” home purchase ($10,000 lifetime maximum), qualified higher education expenses, qualified reservist, Roth conversions or IRS levy. To see if a Roth conversion is best for your individual situation, please contact your Financial Advisor.
Choosing the Right IRA
With your many options, how do you know which IRA is right for you?
- In general, the Traditional Deductible IRA may be most attractive to eligible individuals who anticipate being in a lower tax bracket in retirement.
- The Roth IRA may appeal to eligible investors who expect their tax bracket to be the same or higher in retirement, those who are most interested in passing IRA assets to their heirs or those who have a long time before they will need their IRA assets.
- The Non-Deductible Traditional IRA may be a viable savings option for those who do not qualify for a Roth or Traditional Deductible IRA.
- Those who are focused on the future needs of younger family members may want to consider the tax-free benefits available with a Coverdell Education Savings Account.
To make the best decision with so many IRA options available, you must consider factors like your current and future tax rates, your income and marital status, your anticipated use of the IRA funds and the availability of a retirement plan at your place of employment.
We Help You Choose
At our firm, we understand the significance of your retirement planning decisions. We offer the services you need to better understand which IRA is best for your personal financial situation. Contact your Financial Advisor today for a complimentary consultation.
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