What's the difference between a Traditional IRA and a Roth IRA?

Traditional IRA – The traditional IRA allows you to defer taxes on the earnings on your contributions until they are withdrawn. Also, certain contributions are tax deductible in the tax year for which you make them.

Roth IRA – The Roth IRA allows only nondeductible contributions and features tax-free withdrawals for certain distribution reasons after a five-year holding period. Since Roth IRA contributions are nondeductible and taxed in the year they are earned, if you expect to be in a higher tax bracket when you retire, you may benefit more from a Roth IRA than from traditional IRA.

Am I eligible for either account?

Traditional IRA – You are eligible to establish a traditional IRA if you are younger than age 70 ½ for the entire tax year and you or your spouse have compensation.

Roth IRA – You are eligible to establish a Roth IRA if you or your spouse has compensation and your modified adjusted gross income (MAGI) does not exceed certain prescribed limits.

You may establish a traditional or Roth IRA even if you already participate in or are receiving contributions from a retirement plan sponsored by your employer, which may include certain government plans, tax-sheltered annuities, simplified employee pension (SEP) plans, Saving Incentive Match Plan for Employees of Small Employers (SIMPLE), or qualified plans.

How much can I contribute each year?

You may contribute any amount up to 100 percent of your compensation or the amount set forth in the chart above, whichever is less, aggregated between a traditional and a Roth IRA. Additionally, if you have attained age 50 or older by the end of your taxable year, you are eligible to make catch-up contributions.

Regardless of age, if you participated in a 401(k) plan with a bankrupt employer whose officers were indicted or convicted where the employer matched at least 50 percent of employee contributions under the 401(k) plan in the form of employer stock, you may make additional IRA contributions up to $3,000 per year for tax years 2007 through 2009.

You may direct all or a portion of any tax refund directly to an IRA beginning January 1, 2008.

Roth IRA contributions are further limited by your MAGI. These prescribed limits for tax year 2008 are:

Can I deduct my IRA contribution?

Traditional IRA – Active participation in employer-sponsored retirement plans and MAGI determine whether you can deduct your IRA contribution. For example, if you and your spouse are not active participants, you may deduct your contribution, no matter how high your income. If you or your spouse is an active participant, the deduction is dependent on your MAGI and income tax-filing status. As your MAGI increases, your deduction decreases. Your tax professional can help you determine whether your contribution is deductible. Even if you cannot deduct your contribution, you can still make nondeductible contributions and take advantage of the tax-deferred earnings.

Roth IRA – Roth IRA contributions are not deductible regardless of participation status and/or MAGI.

Do I pay taxes when distributed?

Traditional IRA – Yes, on the distribution of any tax-deductible contributions and on all earnings. Distributions that include these amounts are taxed as income in the year they are withdrawn.

Roth IRA – Since regular and spousal Roth IRA contributions are nondeductible, distributions of these amounts are not taxable. Another nice Roth IRA feature is that the rules consider all contributions to be distributed before any earnings. This gives you easier tax-free access to the assets. Earnings, however, may be subject to tax unless they are removed as a qualified distribution.

Qualified distribution – Distribution of earnings if five years have passed since you established your first Roth IRA and you are at least age 59 ½ , permanently disabled, taking first-time homebuyer distributions, or deceased.

Nonqualified distribution – Distribution of earnings for any reason other than stated above.

Effective for IRA distributions through December 31, 2009, if you are age 70 ½ or older you may make tax-free distributions to charitable organizations limited to $100,000.

Can I withdraw funds without penalty?

You can withdraw assets from your traditional or Roth IRA without incurring the 10 percent premature-distribution penalty tax any time after you reach age 59 ½. You can avoid the penalty tax before age 59 ½ for the following reasons: disability, substantially equal periodic payments, medical expenses in excess of 7.5 percent of your adjusted gross income, health insurance premiums if you have been receiving unemployment compensation for at least 12 weeks, distributions paid directly to the IRS due to an IRS levy, conversion to a Roth IRA, recharacterization, rollover to an employer-sponsored qualified plan, qualified higher education expenses, a first-time home purchase, or a qualified reservist distribution.

Roth IRA distributions of regular and spousal contribution amounts are always free of penalty tax – regardless of timing or reason.

When must I withdraw funds?

Traditional IRA – When you reach your age 70 ½ year, you must begin to take minimum required distributions or risk additional penalty taxes.

Roth IRA – You are not required to take distributions from your Roth IRA.

Why don't I just open both accounts?

Great idea. Opening both a traditional IRA and a Roth IRA lets you develop your own blend of tax-deductible contributions to your traditional IRA and nondeductible contributions to your Roth IRA. You can decide which is a greater priority for you: minimizing your taxes now through a deduction or minimizing your taxes in the future with tax-free earnings.

How do I find out more about traditional and Roth IRAs?

See any of our IRA representatives. We will explain the nature of these accounts in more detail and help you complete the forms necessary to establish your traditional and/or Roth IRA.