Retirement Accounts and Coverdell ESA's

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.

IRA and ESAs at a Glance (click here)

retirement-coupledining2Contribution 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.

Traditional

retirement-iragraph

Traditional IRA

As of January 1, 2013 the annual contribution limit is $5,500.  The annual limit applies collectively to both Roth and Tradional IRA's.

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

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 While contributions are not tax deductible, contributions and earnings can be withdrawn tax-free with limitations (see chart), and unlike traditional IRAs, you are not required to begin taking required minimum distributions after reaching age 70½.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 ESAs

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 $5,500
Taxable years beginning 2013.*
$5,500
Taxable years beginning 2013.*

$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. Earning grow tax-free. Not taxed. Earnings grow tax-free.

Contribution Restrictions

Based on Adjusted Gross Income (AGI)

 

Yes, if active participant in employer retirement plan.

Deduction Phaseouts

Singles 2013:

$59,000–$69,000

Married Joint 2013:

$95,000–$115,000

The maximum income for married couples filing separately is $10,000.

Contributions Phaseouts

Singles 2013: $112,000–$127,000

Married Joint 2013: $178,000–$188,000

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:
  • Over 59½
  • Death or disability
  • Qualified medical expenses
  • Certain health insurance
  • Qualified college expenses
  • 1st time home purchase (up to $10,000)
  • Due to IRS levy
  • Periodic payments

None if:

  • Account established for 5 years or more
  • Over 59½
  • Death or disability
  • Qualified medical expenses
  • Certain health insurance
  • Qualified college expenses
  • 1st time home purchase (up to $10,000)
  • Due to IRS levy
  • Periodic payments
None if:
  • For payment of qualified education expense, including elementary and secondary schools (K-12th)
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 70-1/2 Not allowed. Allowed. Allowed.

*May be adjusted annually for inflation in $500 incremements.