Traditional IRA

Annual Contribution Limit

• $5000 or if lower, 100% of earned income.
• Individuals who attain age 50 before the end of the taxable year may be eligible to contribute an additional amount of $1000 known as a "catch-up" provision.
  

Eligibility

• Must be under age 70 ½ and have earned income.
• Spouse can make deductible contribution of up to $5000 subject to AGI limitations ($159,000 to $169,000).

Deductibility

• Full deduction allowed if taxpayer is not an "active participant" in an employer-sponsored plan.
• Deduction allowed for "active participants" who meet the AGI limits.

Taxation of Distributions

• Distribution attributable to deductible contributions and all earnings taxed as ordinary income

Taxation of Distributions and Penalty of Early Distribution

• Ordinary income tax rates on entire distribution and a 10% penalty on distributions before age 59-½.

Exceptions to Penalty

• Attainment of age 59-½.
• Death or Disability.
• Substantially equal periodic payments taken over owner's life expectancy.
• Medical expenses in excess of 7.5% of AGI.
• Health insurance premiums (unemployed more than 12 weeks).
• Purchase of a first home. ($10,000).
• Educational expenses. (post secondary)

Required Minimum Distributions

• YES, (must begin by April 1 of the year after attainment of age 70 ½).

Rollovers and Transfers

• Allowed to and from other IRAs and (for rollovers) employer plans.

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Roth IRA

Annual Contribution Limit

• $5000 or, if lower,100% of earned income.
• Individuals who attain age 50 before the end of the taxable year may be eligible to contrubute an additional amount of $1000 known as a "catch-up" provision.
  

Eligibility

• Any age with earned income
  • AGI of $101,000 to $116,000 for single filers
  • $159,000 to $169,000 for married filing joint returns
• Spouse can make contribution of up to $5000 subject to AGI limitations ($159,000 to $169,000)

Deductibility

• Always nondeductible.

Taxation of Distributions

• If a distribution is not considered a qualified distribution, any portion of the distribution that represents earnings will be included as ordinary income on the holder's income tax return.
• In addition, unless the ROTH IRA holder meets an exception, the earnings distributed as part of a nonqualified distribution will be subject to a 10% early distribution penalty.
• Distribution after age 59 ½ tax free if the ROTH IRA held more than five years.
  

Exceptions to Penalty/Qualifying Distribution

• Qualifying Distribution
• Attainment of age 59-½
• Death or Disability
• Substantially equal periodic payments taken over owner's life expectancy
• Medical expenses in excess of 7.5% of AGI
• Health insurance premiums (unemployed more than 12 weeks)
• Purchase of a first home. ($10,000)
• Educational expenses (Post secondary)

Required Minimum Distributions

• NO
• Contributions are permitted after age 70-½ with earned income

Rollovers and Transfers

• ROTH to ROTH transfers may take place generally in keeping with TRADITIONAL IRA rollover rules. That is, such rollovers:
  • Are limited to one rollover per 12 months,
  • Must take place within 60 days of distribution

Conversions from TRADITIONAL IRAs to ROTH IRAs

• Beginning January 1, 1998 an IRA holder may convert his/her TRADITIONAL IRA to a ROTH IRA, unless:
  • He/she is married and filing a separate tax return and/or
  • His/her AGI exceeds $100,000. The taxpayer's AGI limit is determined without considering the additional income resulting from the conversion of the TRADITIONAL IRA.

IMPORTANT INFORMATION REGARDING THE ROTH IRA

• If a ROTH IRA has been in existence for less than five years, withdrawals are presumed for tax purposes to come first from contributions (as opposed to coming from earnings). Since contributions are considered a return of capital, no tax or penalty is due on them regardless of when they are withdrawn.
• However, once an amount equaling the cumulative contributions to a ROTH IRA are withdrawn, all further withdrawals before the ROTH IRA has been in existence for more than five years will be subject to both a tax and a penalty.
• However, no penalty will be imposed if the owner is over age 59½ or if one of the exceptions apply.

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Simple IRA (Savings Incentive Matching Plan for Employees)

Who May Establish?

• Employers with no more than 100 employees and no other qualified plan.
• Qualified tax-exempt organizations (including Indian tribes) and government entities.
  

Eligibility

• All employees of the employer who received at least $5,000 in compensation from the employer during any two preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year.
• Union and nonresident alien employees may be excluded.

Maximum Annual Contribution per Participant

• Employee: 100% of compensation up to $10,000 + $2500 catch-up contribution

Contribution Options for the Employer

• Employer contributions are required either under a matching formula (100% of the first 3% of pay an eligible employee contributes) or non matching formula (2% of the eligible employee's pay regardless of whether the employee contributes). The matching formula can be reduced to 1% and only for two of any five years.

Employee Elections

• An eligible employee must be given the right to enter into a salary reduction agreement for the calendar year, or to modify a prior agreement. Must be during the 60-day period immediately preceding January 1 of the calendar year.(i.e., November 2 to December31 of the preceding calendar year).

Vesting

• All contributions under a SIMPLE plan are fully vested and nonforfeitable when made.

Discrimination Testing and 5500 Filing

• None Required.

Withdrawals

• Employers may not require an employee to retain any portion of the contribution in his or her SIMPLE IRA or otherwise impose any * withdrawal restrictions.
  
  * During the first two years that an employee participates in a SIMPLE IRA, any withdrawal made by a participant who is under age 59-½ is subject to ordinary income tax and a 25% penalty. After the two years, the penalty drops to 10% but all withdrawals are still taxed as ordinary income. Loans are not allowed.

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Educational Savings Accounts

Annual Contribution Limit

• $2,000 per beneficiary (aggregate per beneficiary from all contributors) per year.

Eligibility

• Beneficiary must be under age 18. Contributions can be made only by taxpayers who meet the AGI limits ($95,000 to $110,000 for single filers, $190,000 to $220,000 for joint filers).

Deductibility

• Always nondeductible.

Taxation of Distributions

• Distributions used for qualified educational expenses are tax-free. (Qualified expenses include primary and secondary as well as college tuition, fees, books, supplies, equipment and certain room and board expenses).

Nonqualifying Distributions

1. Taxation - If the Education Savings Account distribution exceeds the qualified higher education expenses in a given year, a portion of the distribution will be included in the beneficiary's gross income.
2. Additional 10% Tax - The taxable portion of an Education Savings Account distribution is subject to an additional 10% penalty tax unless the distribution is:

• Made to the estate of a beneficiary following the death of the original beneficiary.
• Made to the beneficiary on account of disability or
• Made on account of a scholarship, allowance or payment received by the Education Savings Account holder to the extent the amount of the payment does not exceed the amount of the scholarship, allowance or payment.

Required Minimum Distributions

• NO.

Rollovers and Transfers

• Before the beneficiary reaches the age of 30, balance may be transferred into an Education Savings Account for another family member.

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