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Traditional IRAs
Tax advantages alone make traditional IRAs an ideal
component in any retirement plan. Thanks to the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),
individuals may contribute more than ever to their
retirement plans making the IRA an even more attractive
retirement vehicle.
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Who can contribute?
Any individual (and the spouse of an individual) under the
age of 70½ who has earned income wages or a salary.
What are the contribution limits?
Beginning in 2002, annual contributions have
increased to $3,000 for an individual. If your customer is
age 50 or older, they may contribute an additional $500 per
year. Starting in 2006 that number increases to $1,000.
 Year |
Age
49 and Under |
Age
50 and Over |
| 2002 |
$3,000 |
$3,500 |
| 2003 |
$3,000 |
$3,500 |
| 2004 |
$3,000 |
$3,500 |
| 2005 |
$4,000 |
$4,500 |
| 2006 |
$4,000 |
$5,000 |
| 2007 |
$4,000 |
$5,000 |
| 2008 |
$5,000 |
$6,000 |
After 2008, IRA limits will be adjusted according to the
cost of living.
For a married couple with only one spouse working,
contribution limits have also increased. A total of $6,000
may be contributed in 2003, with no more than $3,000
allocated to each plan.
When do contributions have to be
made?
Contributions can be made no later than the tax date of the
following year, which for most is April 15th. For example,
the 2003 IRA contribution can be made between January 1,
2003 and April 15, 2004.
What are the withdrawal
provisions?
Before recommending an IRA to your customer, there are a
couple of things to keep in mind regarding withdrawals.
Although some of the rules have been eased, there are still
limitations and restrictions about the withdrawal of money
from an IRA. Withdrawals before the age of 59½ are
considered premature and are generally subject to a federal
tax penalty of 10% in addition to ordinary income taxes.
Roth IRAs
Similar to the traditional IRA, Roth IRAs are an
important retirement tool and offer many advantages.
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Who can contribute?
Any individual and the spouse of an individual with
earned income according to the following guidelines:
|
Filing
Status
|
Modified
Adjusted Gross Income |
Roth
IRA Eligibility |
|
Single |
$95,000
or less |
Full
contribution |
|
|
$95,001
- $109,000 |
Reduced
contribution |
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$110,000
or more |
No
contribution |
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Married
-
Filing
Jointly |
$150,000
or less |
Full
contribution |
|
|
$150,001
- $159,000 |
Reduced
contribution |
|
|
$160,000
or more |
No
contribution |
What are the contribution
limits?
Beginning in 2002, annual contributions increased to
$3,000 for an individual. If your customer is age 50
or older, they may contribute an additional $500 per
year. Starting in 2006, that number increases to
$1,000.
|
Year |
Age
49 and Under |
Age
50 and Over |
|
2002 |
$3,000 |
$3,500 |
|
2003 |
$3,000 |
$3,500 |
|
2004 |
$3,000 |
$3,500 |
|
2005 |
$4,000 |
$4,500 |
|
2006 |
$4,000 |
$5,000 |
|
2007 |
$4,000 |
$5,000 |
|
2008 |
$5,000 |
$6,000 |
After 2008, IRA limits will be adjusted according to
the cost of living.
For married couples with only one spouse working,
contribution limits have also increased. A total of
$6,000 may be contributed in 2003, with no more than
$3,000 allocated to each plan. Total family
contribution may not exceed total family
compensation.
When do contributions
have to be made?
Contributions can be made no later than the
tax date of the following year, which for most is
April 15th. For example, the 2003 IRA contribution
can be made between January 1, 2003 and April 15,
2004.
What are the withdrawal
provisions?
Similar to the traditional IRA, withdrawals
before the age of 59½ are generally subject to a 10%
federal tax penalty, but the Roth IRA offers
tax-free withdrawals under the following conditions:
Contract has been held for more than five years and the owner is age
59½
Purchase of a primary residence (up to $10,000)
by a first-time homebuyer
Distributions due to death or disability of the
owner
What are the benefits of
investing in a Roth IRA?
Tax deferral – Earnings grow tax-free
Tax free withdrawals – Withdrawals can be made
tax free
Flexible investment options – Roth IRAs can take
the form of many investments, such as variable
annuities, mutual funds, and many bank products
No Required Minimum Distributions – No IRS RMDs
Continuous contributions – Contributions may
continue after age 70½ as long as the contributor
has eligible income
Flexible withdrawal options - Contributions can
be withdrawn at any time
Are there any
disadvantages?
As with any investment, there are some
disadvantages.
Contributions are never tax deductible – Because
withdrawals can be tax-free, taxes must be paid on
contributions. Therefore, they are never tax
deductible.
Withdrawal penalties – Significant tax
consequences for premature withdrawals.
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