Individual Retirement Accounts
What is an Individual Retirement Account (IRA)?
An Individual Retirement Account (IRA) is a special tax deferred savings
account authorized by Internal Revenue Code section 408. It is a unique and simple way to
encourage people to save money for retirement.
Is an IRA still a sound, tax-advantaged investment?
Yes, definitely. Not only are IRA contributions either fully or partially
tax deductible for most income earners, but the interest - or earnings - generated by an
IRA are sheltered from income taxes for everyone, until the funds are withdrawn.
These funds may grow into a sizeable amount because of the compounding of interest, and not having to pay current taxes on IRA earnings.
Some accountholders will make contributions that are not currently deductible, but these nondeductible contributions are still desirable because the income earned by them is sheltered from current taxation.
Am I eligible to contribute to an IRA?
You are eligible for a regular contribution if you do not reach age 70 1/2
in the calendar year and you have compensation (income earned from performing material
personal services). You may also qualify for a rollover, SEP or transfer contribution.
When do I have to establish and fund the IRA?
You have until the due date for filing your Federal tax return, normally
April 15th, to establish and fund your IRA for the previous tax year. It is advantageous
for you to fund your IRA early in the year to let the tax sheltered earnings go to work
for you right away.
Must I make a contribution each year?
No. You can vary your contributions as you wish.
How much can I contribute?
If you are under 70 1/2 and have earned income, you can contribute 100% of
your earned income, up to $2,000 to your IRA each year. Whether you receive a deduction
for your contribution depends on whether you or your spouse are an active participant in
an employer sponsored retirement plan, your adjusted gross income, and your tax return
filing status.
How much will be deductible?
Are you or your spouse covered under an employer sponsored retirement
plan? If not, you will receive a full deduction regardless of your income.
If you or your spouse are covered under an employer sponsored retirement plan, you will receive a full, partial or no deduction, depending upon your marital status and the amount of your adjusted gross income (AGI).
Contribution Deductibility Chart
...for participants in employer-sponsored retirement plans.
| Amount of AGI- | |
| Married Filing Jointly | |
| Below $40,000 | Fully deductible |
| $40,000-$50,000 | Partially deductible |
| Over $50,000 | Not deductible |
| Single | |
| Below $25,000 | Fully deductible |
| $25,000-$35,000 | Partially deductible |
| Over $35,000 | Not deductible |
| Married Filing Separately | |
| Below $10,000 | Partially deductible |
| $10,000 or Over | Not deductible |
My spouse doesn't work outside the home. What contribution limits apply with a non-working spouse?
Contributions for non-working spouses are called spousal contributions.
Where one spouse works and the other doesn't have earned income, or has compensation of
less than $250, the IRA contribution limit increases to 100% of earned income, up to
$2,250. Separate IRAs need to be established and a joint tax return must be filed.
Although the $2,250 contribution can be split any way you desire, not more than $2,000 can
be contributed in a single year to either your IRA or your spouse's IRA.
Can I make nondeductible contributions?
If you are under age 70-1/2 and have earned income, you are eligible to
make nondeductible IRA contributions. You can make a contribution equal to 100% of you
earned income, up to $2,000. Even if you qualify for a deduction, you can designate your
contribution as non-deductible when you file your Federal tax return. Make sure you keep
track of the amount of you nondeductible contributions by filing the IRS Form 8606 with
your tax return. By doing this, you will not have to pay income tax on these contributions
when you withdraw money from your IRA.
When may I start to take money from my IRA?
You may begin withdrawals at any time. However, withdrawals from your IRA
before you reach age 59-1/2 will generally result in an additional tax of 10% of the
amount withdrawn. This is in addition to the regular income tax on the amount withdrawn.
The additional tax does not apply is you are totally disabled, or if you qualify for the
substantially equal periodic payment exception.
When must I start to withdraw the money in my IRA?
You must make a withdrawal of a minimum amount by April 1st of the year
following the calendar year in which you reach age 70-1/2, and by each December 31st
thereafter. The minimum amount is calculated using the IRA minimum distribution rules then
in effect.
How will the distribution be taxed to me?
If you have not made any nondeductible contributions, then the
distributions will be taxable as ordinary income. However, if you have made both
deductible and nondeductible contributions, then you will not have to pay income tax pro
rata on the part of your distribution representing your nondeductible contributions.
Consult your tax preparer.
How much money will I have in my IRA when I retire?
The amount you will have depends upon how much you save in your IRA and
the rate of return you receive. Assuming that you make contributions at the indicated
level each year and your investment receives (for example) a 7% interest rate compounded
quarterly, you could have a substantial amount as illustrated in the growth chart below.
| Annual Deposit |
Years | |||
| 10 | 20 | 25 | 30 | |
| 1,000 | 14,939 | 44,843 | 69,630 | 104,699 |
| 2,000 | 29,879 | 89,687 | 139,261 | 209,398 |
| 2,250 | 33,614 | 100,898 | 156,669 | 235,572 |
| 3,000 | 59,759 | 179,375 | 278,523 | 418,796 |
What is a rollover contribution and when am I eligible to make such a contribution to an IRA?
A rollover is defined as a tax free transfer of cash or other assets which
have been paid to you from the retirement program (e.g. qualified plan, IRA or section 403
annuity) and deposited into another retirement program. A number of rules must be meet to
have a valid rollover. One rule is that you must complete the rollover contribution within
60 days of the day the funds were received by you.
There are certain distributions from qualified retirement programs which do NOT qualify to be rolled over to an IRA. In general, you must receive either a qualifying partial distribution or a qualified total distribution, as those terms are defined in the Tax Code, to be eligible to make a rollover contribution. One of our personal bankers will be happy to discuss your rollover options with you.
Is my IRA insured?
Depending on the investments you choose, your IRA funds are insured by
agencies of the Federal government up to $100,000. Some investments, such as mutual funds,
stocks, and bonds, are not eligible for this Federally backed insurance. We offer
investments which are eligible for this $100,000 Federal insurance.
What happens to my IRA when I die?
The funds in your IRA will be paid to your beneficiaries . Depending on
their relationship to you, your beneficiaries may have the potential to continue to
shelter the funds from current taxation.
How do I start my IRA?
Just come in and talk with us. We will be happy to discuss the benefits of
IRAs with you and explain our investment options.
