The new Taxpayer Relief Act of 1997 has created a variety of new IRA options with new rules for traditional IRAs and two new types of IRAs. Traditional IRAs are more attractive than ever because expanded income limits mean more people will be able to deduct their contributions. In addition, new penalty free withdrawals are allowed for qualified educational expenses and for first time home purchases.
Contributions to the new Roth IRA or Education IRA aren't tax deductible, but the accounts offer the opportunity for tax free earnings.
To help you understand the basic differences among these IRAs, we have created the following chart for you. These highlights will help you determine which type of IRA might be best for you. For additional information on how each type of account would benefit your specific situation, talk to your tax advisor. When you are ready to contribute to an account, please contact us. We're here to help you with your IRA contributions.
TRADITIONAL IRA
Who Can Contribute?
Anvone under age 70.5 with income from compensation
How Much Can I Contribute?
Total combined contributions to Roth and traditional IRAs up to $2,000/year or 100% of compensation, whichever is less
Who Can Make Deductible Contributions?
• A single person who who does not participate in an employer retirement plan can deduct all contributions, regardless of income
• A single person who participates in an employer retirement plan and has MAGI* of $30,000† or less can deduct all contributions. The $2,000 maximum deduction is phased out between $30,000-$40,000† of MAGI*
• A married couple where neither person participates in an employer retirement plan can deduct all contributions, regardless of income
• A married person who participates in an employer retirement plan can deduct all IRA contributions if they file a joint tax return showing MAGI* of $50,000† or less. The $2,000 maximum deduction is phased out between $50,000-$60,000† of joint MAGI*
• A married person who does not participate and who is married to someone who is in an employer retirement and can deduct all IRA contributions if the person files a tax return showing MAGI* of $150,000† or less. The $2,000 maximum deduction is phased out between $150,000-$160,000† of MAGI*
* MAGI - modified adjusted gross income from the federal tax form † For tax year 1998
What Are The Tax Advantages?
• Earnings compound without tax until withdrawn, usually outearning taxable, non-IRA investments
• Contributions may be tax-deductible
Can I Withdraw From The Account?
Withdraw penalty-free for:
• Qualified educational expenses
• First-time home purchase
• At age 59.5
• If you become disabled
• Qualifying medical expenses (Withdrawal of earnings and deductible contributions results in taxable income)
• Payment to beneficiaries at owner's death
• Health insurance premiums while unemployed
• Married couples filing a joint tax return with MAGI* up to $150,000
• Single tax filers with MAGI* up to $95,000
• Couples and single tax filers with higher incomes may be eligible for reduced contributions
* MAGI - modified adjusted gross income from the federal tax form
How Much Can I Contribute?
Total combined contributions to Roth and traditional IRAs up to $2,000/year or 100% of compensation, whichever is less
Who Can Make Deductible Contributions?
No one can deduct contributions
What Are The Tax Advantages?
• Contributions can be withdrawn tax - and penalty-free anytime
• Earnings can be withdrawn tax - and penalty-free for any of these reasons after the account has been open five tax years: after age 59.5, if you become disabled, or for first-time home purchase
• Withdraw earnings penalty-free for the same reasons as those for penalty-free withdrawals from traditional IRAs (withdrawal is subject to taxes)
Can I Withdraw From The Account?
• Earnings tax-free if account is open for five tax years and withdrawn for a qualified reason
• Not required to start withdrawals at age 70.5
• Taxable income from funds transferred from traditional IRA to Roth IRA by 12/31/98 spread over four tax years
