IRA's

An IRA is an INDIVIDUAL RETIREMENT ACCOUNT. An IRA is a personal savings plan that provides income tax advantages to individuals saving money for retirement purposes.

The Traditional IRA is the original IRA, it is also called regular IRA or ordinary IRA.

Individuals who receive compensation, including alimony, that is includible in gross income and who are not age 70 1/2 or older during the tax year may make contributions to traditional individual retirment accounts (IRAs). Amounts earned in a traditional IRA are not taxed until distributions are made. Generally, contributions to a traditional IRA until distributions are deducted. However, when the individual, or the individual's spouse, is an active participant in an employer-maintained retirement plan, the deduction may be reduced or eliminated. Nondeductible contributions may be made to a traditional IRA and/or Roth IRA.

Maximum Contributions. For 2005 through 2007, it will be $4000.00, and in 2008, it will be $5,000.00. Starting in 2009, the maximum contribution will be subject to an annual inflation adjustment.

"Catch-up" Contributions. An individual who will be at least 50 by the end of the tax year is allowed to make an additional contribution to a traditional or Roth IRA. For 2005, the maximum amount will be $1000.

Roth IRAs. Contributions to a Roth IRA are never deductible. The advantage of the Roth IRA is that the buildup within the IRA (e.g., interest dividends and/or price appreciation) may be free from federal income tax when the individual withdraws money from the account. In general, a Roth IRA is subject to the same rules that apply to a traditional IRA. The following material highlights the special rules that apply only to Roth IRAs.

Contribution Limits. For 2004, the maximum annual contribution that may generally be made Roth IRAs and traditional IRAs is $3,000. The maximum will increase to $4,000 for 2005, 2006 and 2007. For 2008, the maximum will be $5,000. (Note: The maximum annual contribution is the amount that may be contributed to both types of IRAs, not the amount the may be contributed to each type.) Rollover contributions into a Roth IRA are not counted in determining the annual maximum. Unlike traditional IRAs, individuals may make contributions to a Roth IRA after reaching age 70 1/2.

Catch-Up Contributions. An individual who will be at least age 50 by the end of the tax year is permitted to make an additional contribution to a Roth IRA. For 2002 through 2005, the maximum annual amount of the catch-up contribution is $500. Starting in 2006, the maximum amount will be $1,000. An individual who is projected to attain age 50 before the end of a calendar year is deemed to be age 50 as of January 1 of that tax year.

Income Limits. The ability of an individual to make a contribution to a Roth IRA depends upon the amount of the individual's modified AGI. The maximum yearly contribution that can be made to a Roth IRA is phased out for a single individual with a modified AGI between $95,000 and $110,000, for joint filers with modified AGI between $150,000 and $160,000, and for married filing separately with modified AGI between $0 and $10,000. These AGI limits are not adjusted for inflation (Code Sec. 408A(c) (3) (C) (ii)). Modified AGI is generally calculated under the same procedure as that used for traditional IRAs. However, for Roth IRA purposes, modified AGI does not include the income reported from the conversion of a traditional IRA into a Roth IRA.

2180A. Taxation of Roth Distributions. "Qualified distributions" from a Roth IRA are not included in the individual's gross income and are not subject to the additional 10% penalty for early withdrawals. To be treated as a "qualified distribution," the distribution must satisfy a five-year holding period and meet one of four requirements discussed below.

Five-Year Holding Period. To satisfy the five-year holding period, the Roth IRA distribution (including distributions allocable to rollover contributions) may not be made before the end of the five-year period beginning with the first tax year for which the individual made a contribution to the Roth IRA. The five year holding period ends on the last day of the individual's fifth consecutive tax year after the holding period started generally, each Roth IRA owner has only one five-year period for all of the Roth IRAs that the individual owns.

For more information check our Frequently Asked Questions.