Retirement Accounts
Product Information
The information contained on this page is for your reference only. As in all tax-sensitive matters, please consult a Certified Public Accountant before investing.
An Individual Retirement Account (IRA) is an excellent tool for retirement savings. Unlike most investments, depending on the type of IRA you choose, contributions may be tax deductible and will grow either tax-deferred or tax-free.
A Coverdell Education Savings Account (ESA), formerly Education IRA, is a great way for parents, grandparents and others to help meet the rising costs of a student’s education.
Recent tax law changes have made IRAs and ESAs even better.
Contribution Deadlines
Traditional IRAs, Roth IRAs and Coverdell Education Savings Accounts must be opened and/or funded by the April 15th tax filing deadline to receive your tax deductions. A filing extension won’t buy you extra time.
How Your IRA Can Grow
The performance of a $3,000 a year retirement investment plan over time at 4% shows the value of starting early and contributing regularly.
Traditional IRA
The annual contribution limit is $5,000 in 2009 and 2010. After the contribution limit may be adjusted annually for inflation in $500 increments as determined by the IRS. The annual limit applies to any combination of IRA plans other than the ESA. Contributions are fully tax deductible if you are not an active participant in an employer retirement plan or your income does not exceed certain limitations. Investments grow on a tax deferred basis. Distributions must begin at age 70½. Contributions and earnings are taxed only upon withdrawal.
Roth IRA
As long as you have earned income, you can establish and contribute to a Roth IRA even after age 70½. While contributions are not tax deductible, contributions and earnings can be withdrawn tax-free with limitations (see chart), and unlike traditional IRAs, you are not required to begin taking required minimum distributions after reaching age 70½. Recent tax law changes make converting to a Roth IRA a smart move for many more people. The law lifts previous income limits, making it possible to convert from a Traditional IRA to a Roth IRA regardless of income. And there’s more good news: Under a special rule applying to 2010 conversions, you have the option of spreading out your tax liability on a Roth IRA conversion over the 2011 and 2012 tax years.
Catch-up contributions—Individuals who
have reached age 50 by the end of the year are able to make additional
catch-up contributions of $1,000 per year to their traditional or Roth
IRA.
Coverdell Education Savings Account
The annual contribution amount has been increased to $2,000 per beneficiary. While there is no tax deduction for amounts contributed to an CESA, earnings grow tax-free. And your ESA can be used to pay qualified elementary school and secondary school expenses as well as those for higher education.
IRAs and ESAs at a Glance
| Traditional IRA | Roth IRA |
Coverdell ESA (Formerly Education IRA) |
|
|---|---|---|---|
| Qualifications | Must have earned income at least equal to the contribution and not have reached age 70½ by the end of the year. | Must have earned income at least equal to the contribution. There are no age restrictions. | The designated beneficiary must be an individual under the age of 18. The age 18 limitation will not apply to any designated beneficiary with special needs. |
| Maximum Contributions | $5,000 Taxable years and 2010. |
$5,000 Taxable years and 2010. |
$2,000 per beneficiary Contributions do not count against the limits for IRAs |
| Catch-Up (50+Over) | $1,000 | $1,000 | |
| Tax Status of Earnings | Tax-deferred until withdrawal | Not taxed. Earnings grow tax-free. | Not taxed. Earnings grow tax-free. |
| Contribution Restrictions | Yes, if active participant in employer retirement plan. Deduction Phaseouts Singles 2009: Singles 2010: Married Joint 2009: Married Joint 2010: The maximum income for married couples filing separately is $10,000. |
Contributions Phaseouts Singles 2009: $105,000–$120,000 Singles 2010: $105,000–$120,000 Married Joint 2009: $166,000–$176,000 Married Joint 2010:
$167,000–$177,000 The maximum income for married couples filing separately is $10,000. |
Yes, allowed contributions phase out between $95,000-$110,000 for singles and married couples filing separately, and $190,000- $220,000 for married couples filing jointly. |
| Tax Deduction | Yes. Contributions up to the limit are fully tax deductible if you are not an active participant in a retirement plan. Otherwise phase out rules apply. | No. | No. |
| Penalties for Early Withdrawal |
None if:
|
None if:
|
None if:
|
| Required Distributions | Must begin by April following year participant turns 70½. | Only after death of the participant. | Must be complete 30 days after beneficiary reaches age 30 or dies. |
| Contributions After Age 70½ | Not allowed. | Allowed. | Allowed. |