Please Note: The following information regarding Individual Retirement Accounts (IRA) is for reference only. Please consult with your tax advisor to determine if an IRA is right for you.
An Individual Retirement Account (IRA) is a personal savings plan that offers you tax advantages to set aside for your retirement.
What are some of the tax advantages of an IRA? Two tax advantages of an IRA are that:
1) Contributions you make to an IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances, and
2) Generally, amounts in your IRA (including earnings and gains) are not taxed until distributed. In some cases, amounts are not taxed at all if distributed according to the rules.
Traditional IRA
What is a Traditional IRA?
An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.
The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
Contributions, except for rollover contributions, must be in cash. See Rollovers, later.
You must have a nonforfeitable right to the amount at all times.
Money in your account cannot be used to buy a life insurance policy.
Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
You must start receiving distributions by April 1 of the year following the year in which you reach age 70½.
Who Can Set Up a Traditional IRA?
You can set up and make contributions to a traditional IRA if:
You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
You were not age 70½ by the end of the year.
You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan.
When Can a Traditional IRA Be Set Up?
You can set up a traditional IRA at any time. However, the time for making contributions for any year is limited.
Roth IRA
What is a Roth IRA?
A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined below). It can be either an account or an annuity.
To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.
Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.
Who Can Set Up a Roth IRA?
Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:
$160,000 ($166,000 for 2007) for married filing jointly or qualifying widow(er),
$10,000 for married filing separately and you lived with your spouse at any time during the year, and
$110,000 ($114,000 for 2007) for single, head of household, or married filing separately and you did not live with your spouse at any time during the year.
When Can a Roth IRA Be Set Up?
You can set up a Roth IRA at any time. However, the time for making contributions for any year is limited.