IRA F.A.Q.'s


*Information provided below is to give you a general overview of your IRA options. Please ask your tax advisor for complete details before enrolling in an IRA.

Traditional IRA's
Roth IRA's
Coverdell Education Savings Accounts (Education IRA's)

Traditional IRA

Take advantage of tax-deferred earnings and possible yearly deductions.

Who this option is best suited for:
You are a taxpayer under the age of 70 with earned income, or you are a non-working spouse.
Deductible contributions are more important to you than tax-exempt distributions.
You would like to supplement your retirement savings in addition to your employer's retirement plan.
You do not contribute to another IRA or you want to split contributions between a Traditional IRA and a Roth IRA.

How it will benefit you:
Tax-deferred growth potential.
Penalty-free withdrawals for post-secondary education.
Penalty-free withdrawals for first-time home expenses (up to $10,000).
Penalty-free withdrawals for certain medical expenses.
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Roth IRA

Take advantage of potentially tax-exempt withdrawals.

Who this option is best suited for:
Your modified adjusted gross income is less than $160,000 for married taxpayers, or less than $110,000 for single taxpayers.
You have earned income. You want to continue to make contributions after age 70 while working.
You don't want to take mandatory withdrawals after age 70 .
You prefer to have a tax-exempt funds available at retirement.
You do not contribute to another IRA or you want to split contributions between a Traditional IRA and a Roth IRA.

How it will benefit you:
Earnings can grow tax deferred.
Qualified distributions are income tax-free and penalty free after a five-year holding period if taken after age 59.
Qualified distributions are tax-free and penalty free after a five year holding.
Qualified distributions are tax-free and penalty free if taken in the event of death or disability.
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Coverdell Education Savings Account (Education IRA)

Created as an incentive to help parents and students save for education expenses.

Things to know about distributions from Coverdell Accounts:
The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.  The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

How it will benefit you:
Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible.
The Hope and Lifetime Learning Credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax.  Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income.  Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions. 

If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member. For more details, see IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov) or call 800-TAX-FORM (800-829-3676).   

Remember that for the genuine IRS Web site be sure to use .gov.  Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.


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