10 must know IRA terms

By Bankrate.com

An individual retirement account is an excellent resource for growing your retirement portfolio. You enjoy the benefits of compounding growth and tax savings. But with nearly a dozen varieties of IRAs available it can get a bit confusing. Understanding these terms will give you an investing head start.

AGI (Adjusted Gross Income) -- Used to calculate federal income tax, AGI includes all the income you received over the
course of the year such as wages, interest, dividends and capital gains minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses.

Contribution -- IRA contributions are limited to $3,000 a year for those younger than 50 and $3,500 a year for those 50 and older.
Contributions are classified as either tax deductible or nondeductible.

Deductible/nondeductible -- Contributions to a traditional IRA are tax deductible if you are not covered by your employer's
retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending upon your income and filing status. Contributions to a Roth IRA are not deductible.

Education IRA -- In 2001, these plans were renamed the Coverdell Education Savings Account in honor of the late U.S. Sen. Paul
Coverdell. Individuals can make annual contributions of up to $2,000 per child into an account that's exclusively for helping to pay higher education costs. The money contributed to a Coverdell account doesn't count against the $3,000 ($3,500 if 50 and older) annual total individuals may contribute to their combined individual IRAs. The earnings and withdrawals from a Coverdell account are tax-free, but you can't deduct the contributions from your income tax.

IRA (Individual Retirement Account) -- IRAs are retirement accounts with tax advantages. Individuals may contribute up to
$3,000 ($3,500 if 50 or older) annually to an IRA as long as they have earned $3,000 in that year (i.e. you can't pad it with unearned money). The investment grows tax-free until it's withdrawn, usually after age 59½. Money withdrawn before age 59½ will usually get hit with a 10 percent penalty, but there are some exceptions.

MAGI (Modified Adjusted Gross Income) -- For the purpose of determining your contribution limit some people use their
AGI increased by certain exclusions from your income. Examples of exclusions to income include foreign-earned income and housing costs of U.S. citizens or residents living abroad and income from sources within Puerto Rico, Guam or American Samoa.

Required minimum distribution -- Generally, a traditional IRA owner must begin taking money out of the account by April 1 of
the year after he or she turns 70½. The amount is a minimum distribution determined by the account holder's age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to figure the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren't subject to minimum distribution requirements until after the Roth owner dies.

Rollover -- This is the term used when transferring assets from one tax-deferred retirement plan to another. Roth IRA -- The most notable thing about a Roth is withdrawals are tax-free if the account has been open for at least five years and
you're at least 59½ when you start to withdraw money. Contributions to a Roth are not tax deductible. The Roth is named for Sen. William Roth Jr., chairman of the Senate Finance Committee.

Tax and penalty-free withdrawals --You can take money out of your IRA tax-free and penalty-free as long as you repay the
full amount within 60 days. It's a good way to give yourself an interest-free loan. You can only do this once every 12 months.

This type of IRA is ideal for individuals in a lower tax bracket now.000 to a Roth IRA if you are single and make $95. a Chartered Financial Analyst and Assistant Professor of Finance at Morehead State University. you can take distributions earlier. you can take penalty-free distributions before age 59½. Deductions also are limited for married couples filing jointly or qualifying widows or widowers who earn between $60.000. he or she can contribute up to $3.000 ($3. You may make contributions at any age.000 and $50. If you have a non-working spouse.com While there have been some changes in how much you can contribute to individual retirement accounts (with more to come in the next few years). it is a tax-free distribution.Individual retirement accounts: something for everyone By Rosemary Carlson • Bankrate. including a 401(k) account. There is no tax deduction per se for Roth IRAs.000 in adjusted gross income. "The Roth IRA may be even a better deal for those who think they will be in a higher tax bracket at retirement. Profits and income from investments are not taxed until you retire and begin withdrawing funds.500 if 50 or older) to an IRA also as long as the two of you together make at least as much in annual income as you contribute. you usually will face a 10 percent penalty. even after you reach 70½. Traditional IRA: Contributions may be fully deductible. so there is no immediate tax break.000 or less or are married earning less than $150. when you reach age 59½. Contributions are made with money that has already been taxed. You must have your Roth account for at least five years before you can take a penalty free distribution of earnings. If you are a single or head-of-household taxpayer with annual adjusted gross income (AGI) between $40. several types of IRAs have been developed with a variety of characteristics that can meet your investment and retirement needs.000 and are eligible for a company retirement plan.500. partially deductible or not deductible.000 per year. without penalty. Once you're over these limits. at work. your deduction will be reduced if your joint income is between $150. Under certain circumstances.000 or married and earn up to $160. Full allowable contribution generally is allowed if the account holder (or spouse) is not covered at any time during the tax year by a retirement plan. • • • • • • • • • The maximum contribution for the 2003 tax year is $3. In this case. regardless of whether they have company-established pension plans. "The individual retirement account legislation allowed the average person a chance to put money in to a tax-advantaged account.000 to $70. you can't put any money into a Roth IRA. In the year that you will turn 70½ you can no longer make contributions to your account." Grace added. at that age you must start withdrawing the account money or face additional penalties. Distributions of earnings without penalty can be taken after age 59½. but anticipate being in a higher tax bracket at retirement. This is a considerable benefit for individuals. No deduction is allowed if your AGI exceeds $160.000. your deduction will be reduced. If you are a first-time home buyer or become disabled.000 and $160. IRAs can help you avoid some taxes and get a jump-start on retirement too. does have a company pension plan. Roth IRA: • • • • • • • For 2003 returns. plus taxes on the withdrawn amount. In fact. But when Roth money is taken out. You can withdraw funds. If you take out money before then. People 50 or older can make an additional contribution of $500 for a total of $3. your deduction also may be limited if your spouse. Since the original enactment of IRA legislation. your Roth account still will earn money tax-free that you can take out later without tax implications. If you exceed the income limits you can neither contribute to nor roll over other IRA money into a Roth account. Even if you do not have a retirement plan at work. The IRA was originally developed in 1974 for people not covered by a company pension plan.000. If you opened a Roth while you were under the income limits but then later earn more. . but no new contributions are allowed." says Bruce Grace. you can contribute up to $3. You can still contribution but not the maximum amount if you're single and make up to $110. with whom you file a joint return.000. the basic advantage of these accounts remains unchanged. depending upon your income and other retirement coverage.

If you are a small business owner. the account can be transferred to a sibling or the beneficiary's child. SIMPLE IRA (Savings Incentive Match Plans): • • • Like the SEP-IRA. Sen. As a small business owner. Individual Retirement Arrangements. for 2003 you can match each employee's pay up to 3 percent or $8. The penalties for early withdrawal remain the same as with the traditional IRA. the sole proprietor. And don't wait. SEP-IRAs are flexible for employers. can also offer employees basic retirement plans established for the benefit of their employees.Education IRA/Coverdell ESA: • • • • These plans are now called Coverdell Education Savings Accounts in honor of the late U. Small businesses. SEP-IRA (Simplified Employee Pension): • • • • A company-sponsored IRA. . explains the contribution limits for these plans. IRS Publication 590.000. The beneficiary of the education IRA must withdraw the funds by age 30 and pay taxes and penalties on it. Paul Coverdell. not the contributor. it can be opened by the smallest of businesses. the SIMPLE IRA is company-sponsored. Under the SEP-IRA plan. whichever is less. Contributions are deductible.000 ($3. An employer does not have to contribute every year. which cannot afford to sponsor a 401(k) or 403(b). Sole proprietors also now can open individual 401(k) plans. The money contributed to a Coverdell account doesn't count against the $3.000 per child into an account that's exclusively for helping to pay higher education costs. Examine the options and pick the one that maximizes your long-range savings goal. individuals and small businesses have a number of options to sock away money toward future retirement educational needs. The earnings and withdrawals from a Coverdell account are tax-free. If your child received a Coverdell ESA distribution. Individuals can make annual contributions of up to $2. Take advantage of compound earnings and start socking away cash now for tomorrow. The contributions are tax-deductible.500 if 50 and older) annual total individuals may contribute to their combined persoanl individual IRAs.S. an employer can contribute to an employee's existing IRA. SIMPLE IRA contributions are fully deductible. but you can't deduct the contributions from your income tax because the account is for the benefit of the child. Self-employed taxpayers have a different standard for contribution limits than employees of a firm that offers a SEP-IRA plan. However. Just make sure you don't use Coverdell money to pay for the same expenses you use to claim an education credit. you now can also claim Hope Scholarship or Lifetime Learning credits. In addition to these IRA accounts.

000 if you are age 50 or older at the end of the year). You can take out contributions (but not gains) for any reason without penalty or taxes. unless you expect to be in a lower tax bracket during retirement than you are now.and penalty-free as well.000.) Like traditional IRAs." LINK) For a rundown on the rules for contributions and withdrawals for all IRAs. But taxpayers can also roll over assets from their traditional IRA accounts into a Roth. deductible or nondeductible -.figuring out which IRA is best for you can be confusing. withdrawals from Roth IRAs after age 59 1/2 are generally not taxed. you can withdraw your gains tax. deductible or nondeductible -. and singles with MAGI below $122. Which IRA? Age 40 Assumed Rate of Interest 5% Current Tax Bracket 10% Retirement Tax Bracket 10% AMOUNT AVAILABLE FROM: Roth $172. Outside of your corporate retirement plan. use our applet to the right. Who qualifies for 2011? Joint filers with modified adjusted gross income. So Roth IRAs enable savers who remain in the same income tax bracket (or higher) at retirement to accumulate more money than even tax-deductible IRAs do. or MAGI.Roth.000 for joint filers and $107. You pay your taxes on the front end by contributing after-tax dollars. (Though eligible contributions start to phase out at $169.Which IRA Should I Choose? With three options to choose from -. the Roth IRA has flexible withdrawal rules.Roth. if you become disabled. Unlike traditional IRAs (both tax-deductible and nondeductible). Besides fostering tax-free growth.117 With three options to choose from -. you should contribute up to the matching limit before establishing an IRA. This is called a Roth IRA conversion. an IRA is the best way for you to accumulate tax-advantaged retirement savings. But everybody who plans to retire ought to have at least one of them. below $179. the Roth IRA allows 2011 contributions of $5. So. The IRA Buffet Tax Deductible IRA . Trouble is." And remember. see our "IRA Primer. but not on future qualified withdrawals from the Roth account. Our favorite IRA is the Roth.908 Tax Deductible $172. You'll pay income tax on the conversion. To see how your investment would fare in each type of IRA account. Ditto.000 for singles. (See "Roth IRAs: To Convert or Not.031 Non Deductible $165. everyone isn't eligible to open a Roth IRA. if your employer matches your 401(k) contributions. And it's always a better deal than a nondeductible one.figuring out which IRA is best for you can be confusing. a Roth IRA is a better deal than even a tax-deductible IRA. And after you reach age 59 1/2 and have had the account open for five years.000 per person ($6.000.

higher education expenses or in event of disability or death.000 and $122.000 if you are age 50 or older at year-end). $5.000 if you are age 50 or older at year-end). For 2011. eligibility phases out between MAGI of $107.000 not tax-deductible ($6.000 if you are age 50 or older at year-end).000 for uncovered spouse. higher education expenses or in event of disability or death.000.000 and $66.Who's Eligible Annual Contribution Withdrawals Roth IRA Who's Eligible Annual Contribution Withdrawals In tax-year 2011.000 tax-deductible ($6.000 and $110.000 and $179. deductible IRA eligibility for 2011 phases out between MAGI of $169. $5. Penalty-free withdrawals permitted before age 59 1/2 for first-time home purchase up to $10. Penalty-free.000 and $179. Annual Contribution Withdrawals For 2011.000. Nondeductible IRA Who's Eligible Everyone who has earned income. and $169. disability or for first-time home purchase up to $10. If only one spouse participates in an employer-sponsored plan.000 for singles.000 for covered spouse.000 and for married couples with MAGI between $90.000 and $110. Withdrawals taxed as income. . Penalty-free withdrawals permitted before age 59 1/2 for first-time home purchase up to $10. $5.000.000 for married couples. No income cap for singles not covered by an employersponsored retirement plan or for married couples when neither participates in such a plan. but not tax-free withdrawals permitted before age 59 1/2 for higher education expenses. between $90. Tax-free and penalty-free withdrawals of earnings plus contributions after five years if you are 59 1/2 or in the following circumstances: death.000 ($6. eligibility phases out for individuals with MAGI between $56. Withdrawals of earnings taxed as income.000.

000 Back to Top Annual Contribution Limit Traditional IRA Roth IRA 2011 $5.000 for those age 50 or older (subject to modified AGI requirements) 2010 $5.000 2011: more than $107.000 Partial contribution if modified AGI is: 2010: more than $167.000 plus an additional $1.Which IRA Is Best for me? You can choose from two types of IRAs—Traditional and Roth. subject to these modified AGI (Adjusted Gross Income) requirements: Single Filing Status Full contribution if modified AGI is less than: 2010: $105.000 but less than $177.000 but less than $122.000 2011: more than $169.000 Partial contribution if modified AGI is: 2010: more than $105. Use the chart below to compare their features and benefits and determine with your advisor which one is most appropriate for your circumstances.000 2011: $169. .000 2011: $107.000 Married Filing Separately Status Partial contribution available if modified AGI is: 2010: more than $0 but less than $10.000 for those age 50 or older.000 plus an additional $1.000 2011: more than $0 but less than $10.000 plus an additional $1.000 but less than $179.000 for those age 50 or older.000 plus an additional $1.000 for those age 50 or older (subject to modified AGI requirements) 2011 $5. 2010 $5. On this page: • • • • • • • Eligibility Annual Contribution Limit Tax-Deductible Contributions Tax Advantages on Earnings Taxes and Penalties on Distributions Required Minimum Distributions Conversion to Roth IRA Eligibility Traditional IRA Roth IRA All income earners (and non-wage earning spouses).000 All income earners (and non-wage earning spouses) under age Joint Filing Status 70½ Full contribution if modified AGI is less than: 2010: $167.000 but less than $120.

However. • • Full deduction if modified AGI is: 2010: $89.000 2011: more than $56.000 but less than $179.000 Joint Filing Status. Back to Top .000 2011: more than $90.000 or less 2011: $169.000 Joint Filing Status.000 but less than $66. eligibility for deduction is based on modified AGI as follows: Single Filing Status Full deduction if modified AGI is: 2010: $56.000 or less 2011: $90.000 or less Partial deduction if modified AGI is: 2010: more than $89.000 Back to Top Tax Advantages on Earnings Traditional IRA Taxes on earnings are deferred until money is withdrawn.000 or less Partial deduction if modified AGI is: 2010: more than $167.000 but less than $66.000 but less than $109.000 2011: more than $169. Roth IRA Distributions are tax free provided certain conditions are met. If IRA owner and spouse (if applicable) are not eligible to participate in a retirement plan. contributions can be withdrawn tax free at any time. the IRA owner is eligible for a full deduction.000 but less than $110.Back to Top Tax-Deductible Contributions Traditional IRA Contributions may be eligible for a tax deduction. If either the IRA owner or their spouse (if applicable) is eligible to participate in an employer-sponsored retirement plan.000 or less 2011: $56. IRA owner eligible to participate in an employer sponsored plan Roth IRA Contributions are not tax-deductible.000 or less Partial deduction if modified AGI is: 2010: more than $56.000 but less than $177. spouse (but not IRA owner) eligible to participate in an employer sponsored plan • • Full deduction if modified AGI is: 2010: $167.

000 lifetime cap) -uses the distribution for qualified higher education expenses -uses the distribution for deductible medical expenses -uses the distribution for health insurance premiums if IRA owner has been receiving unemployment compensation for at least 12 weeks -uses the distribution to pay a federal tax levy -takes the distribution in substantially equal periodic payments at least annually—based on life expectancy calculations—that continue for at least five years or until age 59 1/2.Taxes and Penalties on Distributions Traditional IRA In general. listed to the left) Roth IRA Back to Top Required Minimum Distributions Traditional IRA In general.000. Early distributions are subject to an additional 10% federal tax penalty unless the IRA owner becomes disabled or dies. minimum distribution rules apply to beneficiaries after account owner's death.000 lifetime cap) Non-qualified distributions of earnings may be subject to ordinary income taxes and an additional 10% federal penalty tax (exceptions to the 10% federal penalty tax are the same as those for Traditional IRAs. distributions are subject to tax at ordinary rates. Roth IRA N/A . or: -receives the distribution after reaching age 59 1/2 -uses the distribution for a first-time home purchase (up to $10. Traditional IRA owners must begin taking distributions no later than April 1st following the year they reach age 70 1/2. IRA distributions made directly to a charity are not subject to income tax. Click here for more information. Roth IRA No minimum distribution is required. However. Distributions of earnings are tax free provided account has been open at least five years and one of the following applies to the IRA owner: -is age 59 1/2 or older -becomes disabled or dies -uses the money for a first-time home purchase (up to $10. Yearly qualified charitable contributions may not exceed $100. Back to Top Conversion to Roth IRA Traditional IRA No restrictions. whichever is later If the IRA owner is 70 1/2 or older.

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