IRA Certificate of Deposit

The different types of IRAs....

How are they Different?

Traditional IRA - In this IRA, contributions you make to the account are often tax deductible and  taxed upon withdrawal.   This allows you to defer taxation until your retirement when you may be in a lower tax bracket.

Roth IRA - This is the newest type of IRA created by the Tax Payer Relief Act of 1997.  Contributions you make now are NOT tax-deductible, but can be withdrawn tax and penalty free at any time.  Earnings can be withdrawn tax and penalty free for certain reasons after five tax years.  If you do not need the immediate tax break or expect to be in a higher tax bracket when you retire, this may be the account for you.

Coverdell(Education) IRA - This IRA allows individuals to save money for a child's higher education on a tax-favored basis.   Withdrawals are tax and penalty free only for qualified higher education expenses.  Earnings are subject to tax and penalty for other withdrawals.

What are the eligibility requirements and how much can I contribute per year?

Traditional IRA -  You must be under 70½  years of age the entire tax year and have earned income to be eligible for the Traditional IRA.  Even if you do not have earned income, you are still eligible as long as your spouse has earned income that year.   If you are under age 50, you may contribute the standard amount.  If you have attained age 50 by the end of the year, you may be eligible for additional "catch-up" contributions.  See the tables below.

Roth IRA -  This account does not have an age restriction, however you must still have earned income in the tax year for which you would like to contribute, AND your modified adjusted gross income (MAGI) cannot exceed certain limitations. See the tables below.

 Traditional and Roth IRA  Annual Contribution Limits

Year   Normal     Catch-up
---------------------------- 
2006   $4,000         $1,000
2007   $4,000         $1,000
2008   $5,000         $1,000
2009+  Indexed*     $1,000

Contributions to a Roth IRA are never tax-deductible. Contributions to a traditional IRA may or may not be deductible in the tax year made, depending on the owner's income tax filing status, adjusted gross income (AGI), and eligibility to participate in a tax-qualified retirement plan through employment. If the traditional IRA owner participates in an employer's qualified retirement plan on any day in the tax year, the deductibility of contributions declines to zero between certain AGI ranges as shown in the following table.

Coverdell(Education) IRA - Contributions can be made for a child under the age of 18 for use in college or other forms of post secondary education.  EIRA proceeds may also be used free of tax and penalty to pay for the qualified expenses of a kindergarten through 12th grade education in public, private, and/or religious schools. EIRA contributions are limited to a maximum of $500 per year, but that's in addition to the $2K limit on any other IRA.

When MUST I take distributions from my IRA and how do I withdraw funds without any tax penalty?

Money may be withdrawn from an IRA at any time, but on withdrawal it may be taxed and/or penalized. Withdrawals from a traditional IRA will always be taxed, either in whole or in part, at ordinary income tax rates. Except as noted below, withdrawals from a traditional IRA prior to age 59 1/2 will result in a 10% excise tax as well as an ordinary income tax.

A Roth IRA allows you greater flexibility by allowing you, in many cases, to withdraw your principal contributions at any time tax-free, without penalty. First-time homebuyers can pull out $10,000 in profits penalty free and tax-free if the money has been in the Roth IRA for at least five tax years. There are also some breaks for education spending, though an Education IRA may be a better vehicle for education savings. Barring these exceptions, though, profits withdrawn before retirement age and before the money has been in the Roth for at least five tax-years will be taxed, plus you'll also incur a 10% penalty when those earnings are taken before age 59 1/2. 

Mandatory distributions for traditional IRAs must begin no later than April 1 of the year following the year the IRA owner reaches age 70 1/2. Failure to take required minimum distributions at that age results in a 50% excise tax on the amounts not distributed. 

There are eight exceptions to the 10% penalty for IRA withdrawals prior to age 59 1/2. The early withdrawal penalty does not apply to distributions that:

1. Occur because of the IRA owner's disability.
2. Occur because of the IRA owner's death.
3. Are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.
4. Are used to pay for unreimbursed medical expenses that exceed 7 1/2% of adjusted gross income (AGI).
5. Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
6. Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
7. Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
8. Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.

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