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IRA Facts

What is a Traditional IRA?

A Traditional individual retirement arrangement (IRA) is a special domestic trust, custodial account, or annuity contract established to hold assets for an individual’s retirement. An IRA is not a certificate of deposit, money market account, or any other type of investment.

What are the benefits of having a Traditional IRA?

All taxpayers should have a savings plan to guarantee a financially secure retirement. IRAs can be an important part of this savings plan because they provide significant income for retirement and offer tax benefits along the way.

How many Traditional IRAs may an IRA holder have?

IRA holders may have more than one Traditional IRA. If an individual signs one set of opening documents and makes contributions for subsequent tax years under that same plan agreement, only one Traditional IRA exists. If an individual has more than one IRA (including deemed IRAs established through qualified employer plans), she must aggregate all her contributions made for a given year to stay within specified annual contribution limits.

Who is eligible to make Traditional IRA contributions?

An IRA holder must be under age 70 ½ and have compensation from personal services rendered to contribute to a Traditional IRA. Compensation generally is what an individual earns from working.

What are the contribution limits for a Traditional IRA?

The law dictates the maximum IRA contribution amount. The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) defines increases in the maximum contribution amount through 2008, with potential cost-of-living adjustments (COLAs) thereafter. Following are the contribution limits.

  under 50
  over 50
  under 50
  over 50

Eligible individuals age 50 and older may make additional contributions to their Traditional IRAs in the form of catch-up contributions. EGTRRA sets the maximum amount for catch-up contributions to IRAs as $1,000 for 2006 and beyond.

When must IRA holders being taking money out of their Traditional IRAs?

IRA holders must begin taking money out of their Traditional IRAs by April 1 following the year in which they turn 70 ½ (also known as the IRA holder’s required beginning date). The minimum amount that the IRA holder must distribute for a given tax year is called the required minimum distribution (RMD). Failure to remove the RMD results in an excess accumulation penalty equal to 50% of the amount that should have been withdrawn.

What is a Roth IRA?

A Roth IRA is a type of IRA, first available January 1, 1998, where contributions are not deductible, but distributions can be tax free if certain circumstances exist. This IRA is named after former Senate Finance Committee Chairman William Roth (R-Delaware), who spearheaded the campaign to enact these types of IRAs.

Who is eligible to contribute to a Roth IRA?

To contribute to a Roth IRA, an individual (or spouse) must have eligible compensation (i.e. earned income) equal to or greater than the amount of the Roth contribution (the maximum annual contribution is $5,000 for 2009 and 2010, plus catch-up contributions (if eligible). Compensation for Roth IRAs is defined the same as for Traditional IRAs. In addition, a person’s modified adjusted gross income (MAGI) must fall within the applicable limits for her tax filing status. Unlike a Traditional IRA, there is no age limit for making contributions to a Roth IRA.

What are the contribution limits for a Roth IRA?

An eligible individual may contribute the lesser of the annual contribution limit, or 100% of eligible compensation to a Roth IRA. The maximum applies to all Traditional and Roth IRA contributions made for the tax year, in aggregate. These contribution amounts may be adjusted for cost-of-living increases.

Also, IRA holders who are 50 and older may make catch-up contributions of up to $1,000 annually.

What is the deadline for contributions to a Roth IRA?

The contribution deadline is the taxpayer’s tax return due date, excluding extensions.

Can spousal contributions be made to a Roth IRA?

Yes. Spousal contributions may be made to Roth IRAs.

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