Beyond Roth and Traditional, There are Other Choices
What don’t you know?
Many Americans know about Roth and traditional IRAs … but there are also many other types of IRAs. Here’s a quick look at several basic classes of IRAs, as well as some variations and additional information.
Traditional IRA
Contribution limit of $5,500, $6,500 if you are 50 or older1 A traditional IRA (or deductible IRA) is an individual savings plan for anyone who receives taxable compensation. IRA assets may be invested in any number of vehicles, and contributions may be tax-deductible. Earnings in a traditional IRA grow tax-deferred until withdrawal, but they will be taxed when withdrawal begins – and withdrawals must begin by the time the IRA owner reaches age 70½. If these Required Minimum Distributions (RMDs) are not taken at that age, a 50% penalty will be assessed on the amount not distributed. You cannot contribute to a traditional IRA after age 70½. The IRS considers all IRAs other than Roth and SIMPLE IRAs as traditional IRAs.2
Roth IRA.
Contribution limit of $5,500, $6,500 if you are 50 or older1 A Roth IRA offers you:
- tax-free compounding,
- tax-free withdrawals if you are older than age 59½ and have owned your account for at least five years,
- the potential to make contributions to your IRA after age 70½ without having to take RMDs. While contributions to a Roth IRA are not tax-deductible, a Roth IRA has an advantage on the back end, with fewer requirements and limitations regarding withdrawals.3,4
Today, anyone with a traditional IRA may convert it to a Roth IRA. However, your ability to contribute to a Roth IRA may be restricted: in 2011, phase-outs kick in for joint filers whose modified adjusted gross income (MAGI) exceeds $169,000 and single filers whose MAGI exceeds $107,000.5
SIMPLE IRA.
Contribution limit of $12,000, $2,500 catch-up contribution allowed if you are 50 or older6 SIMPLE IRAs are qualified retirement plans for businesses with 100 or fewer employees. They are much easier (and more affordable) to administrate than 401(k) or 403(b) plans. They are funded by “elective deferrals” (salary reduction contributions from employees), and generally the employer has to match employee contributions on a dollar-for-dollar basis up to 3% of an employee’s compensation.6
SEP
Contributions cannot exceed $51,000 or a maximum of 25% of employee compensation7 SEP stands for Simplified Employee Pension. These traditional IRAs are set up by an employer for employees, and like a pension plan, funded by employer contributions only. Contributions are tax-deductible, but qualified withdrawals taken after age 59½ are taxed at standard income tax rates. If an employer implements an SEP plan, allocations to all employees’ SEP-IRAs must be proportional to their salary/wages.7
Individual Retirement Annuity
Maximum contribution set at traditional or Roth IRA contribution limits8 Some annuity contracts allow you to set up a traditional or Roth IRA with a life insurance company. Payments to the annuity may be made by the annuity owner or another party. The annuity owner’s entire interest must be fully vested, and the owner cannot transfer any of the balance to someone else.8
Spousal IRA
Contribution limit of $5,500, $6,500 if you are 50 or older9 This is actually a rule that lets a working spouse make traditional or Roth IRA contributions on behalf of a non-working or retired spouse. The working spouse’s income is the determining factor as to whether or not a “Spousal IRA” contribution can be made. Contribution limits and eligibility requirements are the same as those for a regular IRA.
Inherited IRA
No contributions allowed in some cases A Roth or traditional IRA inherited by a non-spousal beneficiary. You cannot treat this IRA as your own. (If you inherit your spouse’s IRA, you can name yourself as the new owner and sole beneficiary and make contributions and withdrawals from it.) Distributions from inherited IRAs are subject to the minimum distribution rules; they must be taken over your lifetime, and the inherited IRA assets cannot be rolled over into an IRA you own.10 Inherited traditional IRAs may not be converted into Roth IRAs, but thanks to IRS Notice 2008-30, non-spouse beneficiaries of company retirement plan assets may now convert those inherited assets into Roth IRAs.11
Group IRA
Contribution limit of $5,500, $6,500 if you are 50 or older1 A “Group IRA” is simply a traditional IRA offered by employers, unions, and other employee associations to their employees, administered through a retirement trust.
Rollover IRA
Contribution limit of $5,500, $6,500 if you are 50 or older1 Assets distributed from a qualified retirement plan may be rolled over into a traditional IRA, which may be converted later to a Roth IRA. Assets can be commingled within the IRA and rolled into another employer plan in the future.12
Education IRA (Coverdell ESA)
Contribution limit of $2,00013 The Coverdell ESA provides a vehicle to help middle-class investors save for a child’s education. Parents, guardians, and even corporations or partnerships can currently make nondeductible contributions totaling up to $2,000 annually into a Coverdell ESA on behalf of a minor. Starting in 2013, only individuals will be able to make contributions of $2,000 maximum per Coverdell ESA beneficiary. You get tax-free growth and tax-free withdrawals, provided the money is used for education expenses. Starting in 2013, any distributions that you use to pay elementary or secondary school expenses will be taxed. Contributions to a Coverdell ESA are not deductible.13
The Bottom Line
You should consult a qualified financial advisor regarding your IRA options. There are many choices available, and it is vital that you understand how your choice could affect your financial situation. No one IRA is the “right” IRA for everyone, so do your homework and seek advice before you proceed. Call our office at (214) 720-4400 or click here to set your appointment with MGAM today.
- http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limitsl [01/18/13]
- irs.gov/publications/p590/ch01.html#d0e8323 [11/19/08]
- fool.com/Money/AllAboutIRAs/allaboutiras03.htm [11/19/08]
- irs.gov/publications/p590/ch02.html#d0e9236 [11/19/08]
- http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Contributions [03/05/13]
- irs.gov/retirement/participant/article/0,,id=211345,00.html [11/1/10]
- http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions [02/13/13]
- investopedia.com/terms/i/individual_retirement_annuity.asp [11/19/08]
- irs.gov/retirement/participant/article/0,,id=211358,00.html [11/1/10]
- usatoday.com/money/perfi/taxes/2007-04-13-aicpa13-saks_N.htm [4/13/07]
- irahelp.com/newsletter/files/0088-2008-APR%20(1).pdf [4/08]
- fool.com/Money/AllAboutIRAs/allaboutiras02.htm [11/18/08]
- economy.kansascity.com/?q=node/11047 [6/10/11]
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