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What is an IRA? “IRA” stands for Individual Retirement Account. Depending on your needs, Guaranty Bank offers traditional IRAs, Roth IRAs, and Coverdell Education Savings Accounts (formerly known as education IRAs) to its customers.
What are the benefits of an IRA? Many people are able to deduct the full amount of any contribution made to a traditional IRA. Plus, even if a contribution to a traditional IRA is not tax-deductible, it earns tax-deferred interest. Contributions to a Roth IRA or a Coverdell Education Savings Account are not deductible, but all of your earnings are tax-free when withdrawals are made in accordance with legal guidelines. Consult your tax adviser regarding deductibility of contributions and tax deferral of interest.
Who can invest in an IRA? You may set up and make contributions to a traditional IRA if you are not age 70 ˝ by the end of the taxable year and if you have taxable compensation during the taxable year. For more information on what constitutes taxable compensation, refer to IRS Publication 590, “Individual Retirement Arrangements” and consult your tax adviser. Regardless of your age, you may contribute to a Roth IRA if you have taxable compensation for a year and your modified adjusted gross income for that year is less than:
Is the money I put into an IRA account insured? IRA accounts are insured separately, up to an aggregate of $250,000, from other individual deposit accounts held by the same individual at the same financial institution.
What is the deadline for investing in an IRA? You may open or contribute to your IRA for a year at any time during the year. You may open or contribute to an IRA for the previous year at any time prior to the due date (not including extensions) for filing your tax return for the previous year. For most people, this means that contributions for 2006 must be made by April 15, 2007.
Can I convert my existing traditional IRA into a Roth IRA? Yes, if your modified adjusted gross income is $100,000 or less, you may convert (roll over) your existing traditional IRA into a Roth IRA. Married individuals filing separately may not convert a traditional IRA to a Roth IRA. A conversion is treated as a taxable distribution. This means that you must include in your gross income any amounts that you would have had to include in income if you had received a distribution from a traditional IRA rather than converted it to a Roth IRA. If only fully deductible contributions were made to your traditional IRA, the entire amount would be fully taxable. If you made nondeductible contributions to an IRA, the amount converted will be partly taxable. In some situations, a 10% penalty may apply. Consult a tax adviser before making a decision.
How much can I contribute to an IRA account? The maximum amount you can contribute to a traditional or Roth IRA each year is the lesser of (1) the annual IRA maximum, or (2) the amount of your taxable compensation. The annual IRA maximum in 2006 is $4,000 ($5,000 if you are age 50 or older). Working spouses may each invest up to the individual maximum amount. Contributions to a Roth IRA may be further limited if your modified adjusted gross income exceeds certain levels. See IRS Publication 590, Individual Retirement Arrangements and consult your tax adviser for more information. If you earn more than $110,000 ($160,000 if you are married filing a joint income tax return), you may not contribute to a Roth IRA. Generally, you may contribute up to $2,000 to a Coverdell Education Savings Account each year per beneficiary. The designated beneficiary must be 18 years of age or younger (or be a special needs beneficiary). The maximum amount you may contribute is reduced if your income exceeds certain levels. See IRS Publication 970, Tax Benefits for Education and consult your tax adviser for more information.
Can I have a traditional IRA as well as a Roth IRA and make contributions to both in the same year? Yes, but the total combined contribution for the year may not exceed the maximum contribution described above. You must decide whether it is better to make a contribution to a traditional IRA, which might give you an immediate tax deduction, or contribute to a Roth IRA where you forgo the deduction but have the possibility of long-term growth that may later go untaxed. In deciding whether it is better to contribute to a traditional IRA or Roth IRA, you should keep in mind that the maximum amount you may contribute to a Roth IRA may be reduced if your modified adjusted gross income exceeds certain levels. Consult your tax adviser before making a decision.
How will my involvement in an employer-sponsored retirement plan affect my investment in an IRA? If either you or your spouse has a retirement plan, both of you can make full IRA investments. But, depending on your income and the type of IRA you set up, there may be limits to the amount of contributions you may deduct. No deductions are allowed for contributions to a Roth IRA or Coverdell Education Savings Account. Regardless of the amount you may deduct, your entire IRA investment still earns either tax-deferred or tax-free income. Consult your tax adviser before making a decision.
How much can I deduct? Contributions to a traditional IRA are deductible from your income tax according to your adjusted modified gross income and whether you and/or your spouse were covered by an employer retirement plan at any time during the year for which the contribution was made. Consult IRS Publication 590, Individual Retirement Arrangements and your tax adviser for more information on whether your contributions are deductible. Contributions to a Roth IRA or a Coverdell Education Savings Account are not deductible.
Are there any restrictions on distributions? IRA investments may be withdrawn at any time, but the distributions may be subject to a 10% tax penalty in certain situations. Generally, you do not have to pay the 10% tax penalty on distributions from a traditional IRA if the withdrawal is made (1) after you reach age 59 ˝, (2) on account of your total disability or death, (3) for a first-time home purchase, (4) to pay certain medical expenses or (5) to pay higher education expenses. Withdrawals from a Roth IRA are subject to the 10% tax penalty unless the Roth IRA has been opened for at least five years and the distribution is made (1) after you reach age 59 ˝, (2) on account of your death or disability, or (3) for a first-time home purchase. If the money is withdrawn from the IRA for a first-time home purchase, an IRA holder may not withdraw more than $10,000 in a lifetime. The designated beneficiary of a Coverdell Education Savings Account can take a distribution at any time. Generally, distributions are tax-free if they are not more than the beneficiary’s adjusted qualified education expenses for the year. If the distribution exceeds the amount of the beneficiary’s adjusted qualified education expenses for the year, a portion of it will be taxable. Although some exceptions apply, generally if you receive a taxable distribution from a Coverdell Education Savings Account, you also must pay a 10% additional tax penalty on the amount included in income. See IRS Publication 970, Tax Benefits for Education and consult your tax adviser for more information.
Does the amount I contribute to a Coverdell Education Savings Account affect the amount I may contribute to the other IRAs? No. The amount of contributions you may make to a Coverdell Education Savings Account does not affect the amount you may contribute to other IRAs.
What if I still have questions or want to know about Simplified Employee Pension (SEPs) or Keogh plans? Just come by and speak with one of our personal bankers or consult your tax adviser.
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