Traditional IRA

The term used to define the regular IRA to participants under age 70 1/2. Annual contributions have a limit of $3,000 minus the participant’s deductible IRA contributions. Earnings on the account are tax deferred until withdrawal, which must begin at age 70 1/2. Distributions are taxed at that time; if the distributions are not taken at that age, there is a 50% penalty on the amount not taken. After the age of 70 1/2, contributions can be made to the IRA; the limit of $2,000 is phased out if the participant’s AGI falls below a specified level.

Roth IRA

Roth IRAs are similar to traditional IRAs, except that contributions come from after-tax earnings and are not taxed when withdrawn. After holding the Roth IRA account for a minimum of five years and reaching the age of 59 1/2, all withdrawals are tax-free, with the exception of gains.In order to qualify, participants filing jointly must have an adjusted gross income below $160,000 and single participants below $110,000 (note: these numbers change from year to year). Roth IRA’s are described in detail in the next section .

Individual Retirement Annuity

A traditional or a Roth IRA established with a life insurance company through the purchase of a special annuity contract.

Group IRA or Employer and Employee Association Trust Account

A traditional IRA established by an employer for employees.

Simplified Employee Pension (SEP-IRA)

A traditional IRA established by an employer for employees. Employer contributions can be up to $40,000 or 25% of an employee’s annual compensation. Please see  SEP Plan FAQs

Savings Incentive Matching Plan for Employers IRA (SIMPLE -IRA)

A traditional IRA established by small companies for employees. Participants can contribute up to $8,000 a year ($9,000 if age 50 or older); employers will match a portion of the employee’s contribution.

Spousal IRA

A traditional or a Roth IRA set up by a married person in the name of his/her spouse who has an annual income of less than $3,000. There is a $3,000 limit on Spousal IRA contributions, but the working spouse can contribute an additional $2,000 to an individual IRA. Couples must file jointly in that year.

Rollover or Conduit IRA

A traditional IRA established by an individual to receive a distribution from a qualified retirement plan, such as a 401(k). There is no limit on the contributions transferred to a rollover IRA. The amount in the new account is eligible for a consecutive transfer into a new employer’s qualified retirement plan.

Inherited IRA

A traditional or Roth IRA given to a non-spousal beneficiary of a deceased IRA owner. The beneficiary receives the distribution by December 31 of the fifth year after the death of the owner. In addition, this type of IRA does not allow for tax deduction contributions and rollovers to and from other IRAs. The IRA can also be paid as an annuity or in periodic installments not extending beyond the beneficiary’s life expectancy. If the IRA owner dies before naming a beneficiary and has not started taking the minimum required distributions (MRD) at age 70 1/2, then the IRA is paid to the estate by December 31 of the fifth year after the death of the owner. If the owner had already started taking the MRD, then the IRA is paid to the estate over time based on the owner’s life expectancy.

Education IRA (EIRA)

An IRA set up on or after January 1, 1998, that allows a beneficiary to pay for higher education . The name is confusing, since it’s not really a retirement account at all. Contributions are not tax deductible but all deposits and earnings can be withdrawn without additional penalties or taxes. The old law that limits annual contributions to $500, now only applies to higher education costs. An individual may contribute a maximum of $2000 a year to the Coverdell Savings account for eligible expenses associated with attending elementary or secondary school. The beneficiary must be 18 or younger but there are no limits on a beneficiary’s income.

IRA Conversions

A traditional IRA can be converted into a Roth IRA without penalties if the adjusted gross income for the participant is less than $100,000 excluding the amount of the conversion.

These contributions and any earnings are subject to taxation. Any future qualified distributions from the Roth IRA will be tax-free.

The conversion may not always be the best available option. First, the income from the conversion could result in being placed in a higher tax bracket. Second, if the participant is close to retirement, expecting to drop to a lower tax bracket, the conversion will trigger an income tax payment at the current, pre-retirement bracket.

On the other hand, if the IRA owner wants to leave the account as part of his or her inheritance, transferring the funds to a Roth IRA can have great benefits for the heirs. First of all, there are no minimum distributions during the life of the owner. Second, the conversion will reduce the participant’s taxable estate by the amount of the taxes, therefore reducing the inheritance. Finally, if after April 1 and after turning 70 1/2 the participant has not yet named a beneficiary, it is possible to convert the account to a Roth and name a new beneficiary at that time, allowing this person to keep the IRA during his or her expected life as calculated by the IRS.

IRA Rollovers

This is the process in which the assets from one qualified retirement plan or IRA is reinvested in another similar plan within a specific time frame, usually 60 days. These transfers can happen when leaving a job at an employer who offered a retirement plan such as a 401(k).The company can issue a check for the amount minus 20% in withheld taxes. To avoid this penalty, the rollover must be done trustee to trustee, meaning that the check is made out to the new trustee or custodian of the Rollover IRA. The company will provide the check and the participant must deposit the check into the new account within 60 days.Deductible IRAs

A tax-deductible IRA is a traditional IRA that has annual tax-deductible contributions. The maximum amount per year is $3,000 and withdrawals are taxed as income. You can withdraw the money free of penalties before age 59 1/2 if you are buying your first home (up to $10,000), to pay for higher education expenses, or in the event of a disability or even death. Eligibility depends on the modified adjusted gross income; if you participate in an employee-sponsored retirement plan there are no limits on your modified AGI. Eligibility phases out for single tax payers with a modified AGI less than $44,000 and for married couples less than $64,000.

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