Traditional and Roth IRAs

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Posted on 27th July 2011 by Rita in Annuities |Retirement and Estate Planning

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What is an IRA?

  • IRA stands for: Individual Retirement Account.
  • Basically an IRA is a savings account providing big tax breaks and making it an excellent savings vehicle for your retirement cash.
  • Introduced in 1974 under the Employment Retirement Security Act and for a time was restricted to workers who did not have coverage with a qualified employment based retirement plan. This changed in 1981 with the Economic Recovery Tax Act, allowing all taxpayers under the age of 70½ to contribute to the IRA.
  • There are several different types of IRAs: Traditional IRAs, Roth IRAs, SEP IRAs, and Simple IRAs.

What is a Roth IRA?

  • Named after its creator the late Senator William Roth of Delaware.
  • A retirement plan – allowing you to save money for your retirement years.
  • Tax Break given when money is withdrawn from the plan during retirement… so no tax break on money placed into the plan.  

 

Traditional IRA   vs   Roth IRA

Traditional IRA

  • Contribution Limits: $5,000 [age 49 & below] $6,000 [age 50 & above] (2008-2011*)
  • Over limit contribution penalty – 6%
  • Grows tax deferred
  • No Income Limit
  • Contributions are tax deductible (Pre-Tax Dollars)
  • 10% penalty for early non-qualified distributions (some exceptions)
  • Payouts must begin by 70½
  • Traditional IRAs can roll to Roth IRAs if owner’s adjusted gross income is less than $100,000.
  • Note: taxes will be paid on all deductible contributions and earnings during the year that the Traditional IRA is rolled over to a Roth IRA. 

Roth IRA

  • Contribution Limits: $5,000 [age 49 & below] $6,000 [age 50 & above] (2008-2011*) (IRS.gov)
  • Over limit contribution penalty – 6%
  • Grows tax free (Account must be open at least 5 years)
  • Maximum Income limits apply (IRS.gov)
  • Contributions are NOT tax deductible (After-Tax dollars)
  • Qualified distribution cannot occur until account is open for 5 years and owner is 59½. Distributions are NOT taxable.
  • Payouts do not need to begin by 70½
  • Traditional IRAs can roll to Roth IRAs if owner’s adjusted gross income is less than $100,000.
  • Note: taxes will be paid on all deductible contributions and earnings during the year that the Traditional IRA is rolled over to a Roth IRA.

*beginning in 2009, contribution limits will be assessed for potential increase based on inflation

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Note: This blog is designed for general information purposes only. All information presented on this site should not be interpreted as legal advice and the author assumes no responsibility or liability for the actions taken or not taken by the readers based upon such information. For legal and tax advice contact your attorney or tax adviser.
Rita Sollie, Direct Insurance Representative with North Coast Life Insurance Company (NCL). No gimmicks or schemes here, just genuine and honest service. We don’t sell insurance, we solve problems. I welcome the opportunity to show you what NCL can do for your Life Insurance and Financial needs.
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