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    IRA options presentation IRA options presentation Document Transcript

    • Alliance Benefit Group PCA Investment Advisory Services, Inc. Justin E. Seitz Investment Advisor Representative Pension Corporation of Individual Retirement America 2133 Luray Avenue Cincinnati, OH 45206 Arrangements (IRAs) 513-719-4161 fax 513-281-1799 jseitz@pencorp.com www.pencorp.com April 08, 2008
    • Alliance Benefit Group Page 2 of 8 Understanding IRAs An individual retirement arrangement (IRA) is a per- Learn the rules for traditional IRAs sonal savings plan that offers specific tax benefits. IRAs are one of the most powerful retirement sav- Practically anyone can open and contribute to a tradi- ings tools available to you. Even if you're contribut- tional IRA. The only require- ing to a 401(k) or other plan at work, you should also ments are that you must consider investing in an IRA. have taxable compensation and be under age 70½. You What types of IRAs are available? can contribute the maximum allowed each year as long as The two major types of IRAs are traditional IRAs and your taxable compensation Roth IRAs. Both allow you to contribute as much as for the year is at least that $5,000 in 2008 ($4,000 in 2007). You must have at amount. If your taxable com- least as much taxable compensation as the amount pensation for the year is be- of your IRA contribution. But if you are married filing low the maximum contribu- jointly, your spouse can also contribute to an IRA, tion allowed, you can contrib- even if he or she does not have taxable compensa- ute only up to the amount tion. The law also allows taxpayers age 50 and older that you earned. to make additional "catch-up" contributions. These folks can contribute up to $6,000 in 2008 ($5,000 in Your contributions to a traditional IRA may be tax 2007). deductible on your federal income tax return. This is important because tax-deductible (pretax) contribu- Both traditional and Roth IRAs feature tax-sheltered tions lower your taxable income for the year, saving growth of earnings. And both give you a wide range you money in taxes. If neither you nor your spouse is of investment choices. However, there are important covered by a 401(k) or other employer-sponsored differences between these two types of IRAs. You plan, you can generally deduct the full amount of your must understand these differences before you can annual contribution. If one of you is covered by such choose the type of IRA that's best for you. a plan, your ability to deduct your contributions de- Note: If you were affected by Hurricanes Katrina, pends on your annual income (modified adjusted Rita, or Wilma, or if you are a reservist called to ac- gross income, or MAGI) and your income tax filing tive duty after September 1, 2001, and before De- status. cember 31, 2007, special rules may apply to you. For 2008, if you are covered by a retirement plan at work and: • Your filing status is single or head of household, and your MAGI is $53,000 or less, your tradi- tional IRA contribution is fully deductible. Your deduction is reduced if your MAGI is more than $53,000 and less than $63,000, and you can't deduct your contribution at all if your MAGI is $63,000 or more. • Your filing status is married filing jointly or quali- fying widow(er), and your MAGI is $85,000 or less, your traditional IRA contribution is fully de- ductible. Your deduction is reduced if your MAGI is more than $85,000 and less than $105,000, and you can't deduct your contribution at all if your MAGI is $105,000 or more. • Your filing status is married filing separately, your traditional IRA deduction is reduced if your MAGI is less than $10,000, and you can't deduct your contribution at all if your MAGI is $10,000 or more. See disclaimer on final page April 08, 2008
    • Alliance Benefit Group Page 3 of 8 For 2008, if you are not covered by a retirement plan • If your filing status is married filing jointly or quali- at work, but your spouse is, fying widow(er), and your MAGI for 2008 is and you file a joint tax return, $159,000 or less, you can make a full contribu- your traditional IRA contribu- tion to your Roth IRA. Your Roth IRA contribution tion is fully deductible if your is reduced if your MAGI is more than $159,000 MAGI is $159,000 or less. and less than $169,000, and you can't contribute Your deduction is reduced if to a Roth IRA at all if your MAGI is $169,000 or your MAGI is more than more. $159,000 and less than $169,000, and you can't de- • If your filing status is married filing separately, duct your contribution at all if your Roth IRA contribution is reduced if your your MAGI is $169,000 or MAGI is less than $10,000, and you can't contrib- more. ute to a Roth IRA at all if your MAGI is $10,000 or more. What happens when you start taking money from your traditional IRA? Any portion of a distribution Your contributions to a Roth IRA that represents deductible contributions is subject to are not tax deductible. You can income tax because those contributions were not invest only after-tax dollars in a taxed when you made them. Any portion that repre- Roth IRA. The good news is that if sents investment earnings is also subject to income you meet certain conditions, your tax because those earnings were not previously withdrawals from a Roth IRA will taxed either. Only the portion that represents nonde- be completely income tax free, ductible, after-tax contributions (if any) is not subject including both contributions and to income tax. In addition to income tax, you may investment earnings. To be eligi- have to pay a 10 percent early withdrawal penalty if ble for these qualifying distribu- you're under age 59½, unless you meet one of the tions, you must meet a five-year exceptions. holding period requirement. In addition, one of the following must apply: If you wish to defer taxes, you can leave your funds in the traditional IRA, but only until April 1 of the year • You have reached age 59½ by the time of the following the year you reach age 70½. That's when withdrawal you have to take your first required minimum distri- • The withdrawal is made because of disability bution from the IRA. After that, you must take a dis- tribution by the end of every calendar year until you • The withdrawal (of up to $10,000) is made to pay die or your funds are exhausted. The annual distri- first-time home-buyer expenses bution amounts are based on a standard life expec- • The withdrawal is made by your beneficiary or tancy table. You can always withdraw more than estate after your death you're required to in any year. However, if you with- draw less, you'll be hit with a 50 percent penalty on Qualified distributions will also avoid the 10 percent the difference between the required minimum and early withdrawal penalty. This ability to withdraw your the amount you actually withdrew. funds with no taxes or penalties is a key strength of the Roth IRA. And remember, even nonqualified dis- Learn the rules for Roth IRAs tributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, Not everyone can set up a Roth IRA. Even if you and then only to the extent that your distribution ex- can, you may not qualify to take full advantage of it. ceeds the total amount of all contributions that you The first requirement is that you must have taxable have made. compensation. If your taxable compensation in 2008 is at least $5,000 ($4,000 in 2007), you may be able to contribute the full amount. But it gets more com- plicated. Your ability to contribute to a Roth IRA in Both traditional and Roth IRAs feature tax- any year depends on your MAGI and your income sheltered growth of earnings. And both tax filing status. give you a wide range of investment • If your filing status is single or head of house- choices. However, there are important hold, and your MAGI for 2008 is $101,000 or differences between these two types of less, you can make a full contribution to your IRAs. You must understand these Roth IRA. Your Roth IRA contribution is re- differences before you can choose the type duced if your MAGI is more than $101,000 and of IRA that's best for you. less than $116,000, and you can't contribute to a Roth IRA at all if your MAGI is $116,000 or more. See disclaimer on final page April 08, 2008
    • Alliance Benefit Group Page 4 of 8 Another advantage of the Roth IRA is that there are Know your options for transferring no required distributions after age 70½ or at any time during your life. You can put off taking distribu- your funds tions until you really need the income. Or, you can You can move funds from an IRA to the same type of leave the entire balance to your beneficiary without IRA with a different institution (e.g., traditional to tradi- ever taking a single distribution. Also, as long as you tional, Roth to Roth). No taxes or penalty will be have taxable compensation and qualify, you can imposed if you arrange for the old IRA trustee to keep contributing to a Roth IRA after age 70½. transfer your funds directly to the new IRA trustee. The other option is to have your funds distributed to Choose the right IRA for you you first and then roll them over to the new IRA trus- Assuming you qualify to use both, which type of IRA tee yourself. You'll still avoid taxes and penalty as is best for you? Sometimes the choice is easy. The long as you complete the rollover within 60 days from Roth IRA will probably be a more effective tool if you the date you receive the funds. don't qualify for tax- You may also be able to convert funds from a tradi- deductible contributions to tional IRA to a Roth IRA if your MAGI for the year is a traditional IRA. However, $100,000 or less (the $100,000 income limit will be if you can deduct your eliminated for tax years after 2009). This decision is traditional IRA contribu- complicated, however, so be sure to consult a tax tions, the choice is more advisor. He or she can help you weigh the benefits of difficult. Most profession- shifting funds against the tax consequences and als believe that a Roth IRA other drawbacks. will still give you more bang for your dollars in the Note: The IRS has the authority to waive the 60-day long run, but it depends on rule for rollovers under certain limited circumstances, your personal goals and such as proven hardship. circumstances. The Roth IRA may very well make more sense if you want to minimize taxes during retirement and preserve as- sets for your beneficiaries. But a traditional deducti- ble IRA may be a better tool if you want to lower your yearly tax bill while you're still working (and probably in a higher tax bracket than you'll be in after you retire). A financial professional or tax advi- sor can help you pick the right type of IRA for you. Note: You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot be more than $5,000 in 2008 ($6,000 if you're age 50 or older). Even if you're contributing to a 401(k) or other plan at work, you should also consider investing in an IRA. IRAs are one of the most powerful retirement savings tools available to you. See disclaimer on final page April 08, 2008
    • Alliance Benefit Group Page 5 of 8 Comparison of Traditional IRAs and Roth IRAs Traditional IRA Roth IRA Maximum yearly Lesser of $5,000 or 100% of earned Lesser of $5,000 or 100% of earned contribution (2008) income ($6,000 if age 50 or older) income ($6,000 if age 50 or older) Income limitation for No Yes contributions Tax-deductible Yes. Fully deductible if neither you nor No. Contributions to a Roth IRA are contributions your spouse is covered by a retirement never tax deductible. plan. Otherwise, your deduction depends on your income and filing status. Age restriction on Yes. You cannot make annual No contributions contributions beginning with the year you reach age 70½. Tax-deferred growth Yes Yes; tax free if you meet the requirements for a qualified distribution. Required minimum Yes. Distributions must begin by April 1 No. Distributions are not required distributions during following the year you reach age 70½. during your lifetime. lifetime Federal income tax on Yes, to the extent that a distribution No, for qualified distributions. For distributions represents deductible contributions and nonqualified distributions, only the investment earnings. earnings portion is taxable. 10% penalty on early Yes, the penalty applies to taxable No, for qualified distributions. For distributions distributions if you are under age 59½ nonqualified distributions, the penalty and do not qualify for an exception. may apply to the earnings portion. (Special rules apply to amounts converted from a traditional IRA to a Roth IRA.) Includable in taxable Yes Yes estate of IRA owner at death Beneficiaries pay income Yes, to the extent that a distribution Generally no, as long as the account tax on distributions after represents deductible contributions and has been in existence for at least five IRA owner's death investment earnings. years. See disclaimer on final page April 08, 2008
    • Alliance Benefit Group Page 6 of 8 Roth IRA contribution limits for 2008 If your 2008 federal Your Roth IRA contribution is reduced if You cannot contribute to a Roth IRA income tax filing your MAGI is: if your MAGI is: status is: Single or head of More than $101,000 but less than $116,000 or more household $116,000 Married filing jointly More than $159,000 but less than $169,000 or more (combined) or qualifying $169,000 (combined) widow(er) Married filing More than $0 but less than $10,000 $10,000 or more separately These income ranges (other than married filing separately) are indexed for inflation each year. Traditional IRA deduction limits for 2008 If you are covered by an employer-sponsored retirement plan and your MAGI exceeds certain established thresholds, your deduction for your traditional IRA contribution is reduced or eliminated as follows: If your 2008 federal Your IRA deduction is reduced if your Your deduction is eliminated if your income tax filing MAGI is between: MAGI is: status is: Single or head of $53,000 - $63,000 $63,000 or more household Married filing jointly $85,000 - $105,000 (combined) $105,000 or more (combined) or qualifying widow(er)* Married filing $0 - $10,000 $10,000 or more separately * If you're not covered by an employer plan, but your spouse is, your deduction is limited if your MAGI is $159,000 to $169,000, and eliminated if your MAGI exceeds $169,000. These income ranges (other than married filing separately) are indexed for inflation each year. Low and middle-income taxpayers may qualify for a tax credit To claim the credit, you must be at least 18 years old and not a full-time student or a dependent on another taxpayer's return. The credit is in addition to any income tax deduction you might qualify for with respect to your IRA contribution. Here are the credit rates, based on 2008 MAGI limits: Joint Filers Heads of Household Single Filers Credit Rate Maximum Credit $0 - $31,000 $0 - $23,250 $0 - $15,500 50% of contribution $1,000 (up to $2,000) $31,000 - $34,000 $23,250 - $25,500 $15,500 - $17,000 20% $400 $34,000 - $53,000 $25,500 - $39,750 $17,000 - $26,500 10% $200 Over $53,000 Over $39,750 Over $26,500 0% $0 Caution: The amount of any contribution eligible for the credit may be reduced by any taxable distributions you (or your spouse if you file a joint return) receive from an IRA or employer-sponsored retirement plan (or any nontaxable distributions from a Roth IRA) during the same tax year, during the period for filing your tax return for that year (including extensions), or during the prior two years. See disclaimer on final page April 08, 2008
    • Alliance Benefit Group Page 7 of 8 IRA Future Value Illustration These charts illustrate an estimate of the future value of an IRA and compare after-tax values for a Roth vs. a traditional IRA based on the assumptions that follow. Current IRA balance: Estimated annual $0 7% (contributions and investment earnings) rate of return: Estimated income Annual contribution: $5,000 28% tax in retirement: Years until retirement: 30 Years IRA accumulation Com parison of traditional IRA vs. pretax amounts Roth IRA after-tax values $500,000 $500,000 $400,000 $400,000 $300,000 $300,000 $200,000 $200,000 $100,000 $- $100,000 Traditional IRA after Roth IRA estimated tax rate (Qualified distributions $0 applied not subject to federal 1 4 7 10 13 16 19 22 25 28 income tax) Assumptions: The same annual contribution is made at the end of each year until retirement. Earnings are compounded annually. This illustration assumes that all traditional IRA contributions are fully tax deductible. However, note that If either the IRA owner or the IRA owner's spouse participates in an employer-sponsored retirement plan, the deductibility of contributions is subject to limitations based on tax filing status and modified adjusted gross income. This illustration does not account for the tax deductions that may apply in each year that contributions are made to a traditional IRA. Withdrawals from traditional IRAs are subject to federal income tax to the extent that they consist of deductible contributions and investment earnings. Withdrawals made before age 59½ may also be subject to a 10 percent penalty. Contributions to a Roth IRA are not tax deductible. Depending on an individual's tax filing status and modified adjusted gross income, allowable contributions to a Roth IRA may be limited. Qualified distributions from a Roth IRA are not subject to federal income tax. Nonqualified withdrawals of earnings before age 59½ may be subject to income tax and a 10 percent penalty. This is a hypothetical example based on the stated assumptions and is not a guarantee of performance for any particular investment. See disclaimer on final page April 08, 2008
    • Page 8 of 8 Alliance Benefit Group Advisory Services Offered Through PCA Investment Advisory PCA Investment Advisory Services, Inc. Services, Inc. Justin E. Seitz Securities Offered Through Investment Advisor L.M Kohn & Company Representative 9810 Montgomery Rd., Cincinnati, OH 45242 Pension Corporation of Member FINRA/SIPC America And a Registered Broker-Dealer 2133 Luray Avenue Not affiliated with Cincinnati, OH 45206 PCA Investment Advisory Services, Inc. 513-719-4161 fax 513-281-1799 jseitz@pencorp.com www.pencorp.com Copyright 2008 Forefield Inc. All rights reserved.