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Retirement Plans for Individuals

Traditional

A Traditional IRA is an Individual Retirement Account tax-advantaged savings plan set up for your retirement. In order to set up and make contributions to a Traditional IRA you must have received taxable compensation (earned income) during the year and been under age 70 ½ by the end of the year. You can establish a Traditional IRA even if you have other retirement accounts, such as employer-sponsored plans.

You can also set up a spousal Traditional IRA whether or not your spouse has earned income for the year. You can begin taking distributions at age 59 ½.  Distributions must begin by April 1 of the year following the year you turn 70 ½.  There are heavy penalties for early withdrawal, with some exceptions.

You can generally deduct the contributions to your Traditional IRA for the year from your income. Transactions and growth within the IRA are tax-deferred until distribution.  Withdrawals are taxed upon distribution to you.

The contribution limits for a Traditional IRA (which also apply to spousal IRAs are:

YEAR
AGE 49 & BELOW
AGE 50 & ABOVE
 
2007
$4,000
$5,000
 
2008
$5,000
$6,000
 
2009
$5,000
$6,000
 

Traditional IRAs can be converted to Roth IRAs. Consult your tax advisor for information about Roth IRA conversions.

For more information, see Internal Revenue Service Publication 590.

Roth

A Roth IRA is another type of Individual Retirement Account that is subject to most of the rules that apply to Traditional IRAs.  However, unlike a Traditional IRA, you make contributions to your Roth IRA with after-tax dollars, so contributions to a Roth IRA are not deductible. All transactions and growth within the Roth IRA are tax-free, and withdrawals, which can be made at any time, are usually tax-free, as long as you are 59 ½ and have maintained your Roth IRA for at least 5 years.  As in a Traditional IRA, there are some exceptions to the stiff penalties for early withdrawal.

You can make contributions to a Roth IRA after age 70 ½.  If you have more than one Roth IRA, they are treated as a single account when calculating the tax consequences of distributions from any of them.

Roth IRAs are available to single taxpayers making up to $95,000 a year and to married couples making a combined yearly maximum of $150,000 of adjusted gross income.  If your income is in excess of these limits, your ability to contribute to a Roth IRA is phased out until you reach an income of $110,000 for individuals or $160,000 for married couples, when it is eliminated altogether.  The Roth IRA contribution limits are the lesser of the Traditional IRA annual limits (see above) or 100% of earned income minus contributions to IRAs.

Traditional IRAs can be converted to Roth IRAs.  Consult your tax advisor for information about Roth IRA conversions.

For more information see Internal Revenue Service Publication 590.

Comparison Table Traditional vs. Roth IRA

  Traditional IRA Roth IRA
Contributions Contributions are made with pre-tax dollars. Contributions are made with after-tax dollars.
Tax Treatment Growth and income within the account grow tax-free until funds are withdrawn.            Growth and income within the account grow tax-free until funds are withdrawn, provided the taxpayer is at least 59 ½ years old and the account is more than five years old.
Maximum Contributions In 2007, up to $4,000, or $5,000 if age 50+. In 2008 and 2009, up to $5,000 or $6,000 if age 50+.  Maximum is 100% of earned income (Contribution limits are reduced by any contributions made to a Roth IRA.)             In 2007, up to $4,000 or $5,000 if age 50+.  In 2008 and 2009, up to $5,000 or $6,000 if age 50+.  Maximum is 100% of earned income (Contribution limits are reduced by any contributions to a Traditional IRA.)
Eligibility Individuals must have earned compensation and be under age 70 ½.       Individuals must have earned income and adjusted gross income less than $110,000 for single, $160,000 for married couple.
Are Contributions Deductible?       Contributions are deductible     Contributions are not deductible
Penalties for Early Withdrawals There is a 10% penalty if you withdraw your funds prior to age 59 ½.  There are some exceptions.        There is a 10% penalty if you withdraw your funds prior to age 59 1/2. You can always withdraw your contributions without incurring a penalty.  There are some exceptions.
Age for Mandatory Distribution 70 1/2        No Limit

 

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