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NCUA & Equal Housing


Individual Retirement Accounts  


Traditional IRA
& Roth IRA

 

Bullet Traditional IRA: Answers to Your Questions

  • Grow Dollars for tomorrow, save on taxes today.

    A Traditional IRA may provide you significant immediate tax savings, and due to deferral of all taxes on earnings, the power of compound earnings is strengthened.

    With a Traditional IRA:

    • Earnings accumulate tax-deferred
    • Contributions may be tax-deductible.

    Is the Traditional IRA for you?
    Below is a list of the most frequently asked questions about Traditional IRAs. If you still have questions, give us a call or stop in and will be happy to help you find the answers.

    Q: What is a Traditional IRA?
    A: A Traditional IRA is a type of retirement plan that has been in existence since 1975. Traditional IRAs offer tax-deferred earnings and the possibility for tax-deductible contributions. These tax advantages make the Traditional IRA a powerful tool in creating a balanced, long-term savings plan.

    Q: How does a Traditional IRA work?
    A: You can contribute to a Traditional IRA if you earn compensation and you will not reach 70½ by the end of the year. Earnings in a Traditional IRA are not taxed until they are withdrawn. The ability to defer taxes on the earnings, and to withdraw in a year when you may be in a lower tax bracket, can mean more after-tax dollars for your retirement.

    Q: How much can I contribute to a Traditional IRA?
    A: If you meet the eligibility test described above and you are under age 50, you can contribute up to $5,000. For owners age 50 or older, your annual contribution limit is $6,000.

    Q: If I contribute to a Roth IRA, can I contribute to a Traditional IRA, too?
    A: Yes, you can. However, the limits on annual contributions described above apply to any combination of traditional and Roth IRA contributions that you make for the year.

    Q: Can I still contribute to a Traditional IRA if I participate in an employer-sponsored retirement plan?
    A: Yes, your participation in an employer-sponsored retirement plan will not affect your ability to contribute to a Traditional IRA (assuming age and compensation requirements are met). However, their Traditional IRA contributions if participation in an employer-sponsored plan. 

    Q: How much can I deduct?
    A: The amount you can deduct is dependent upon income, marital status, and whether you are an active participant in an employer sponsored retirement plan. If you are single, or married and neither souse is an active participant in a qualified retirement plan, your Traditional IRA contribution is deductible regardless or income. If you or your spouse is an active participant, you may deduct contributions only if your income is below certain limits established by the IRS.

    Smaller deductions are available if your income is within the phase-out range, which is determined by your filing status. Higher-income earners with retirement plans may still contribute, but deductions are not available if income is over the phase-out range.

    If you have questions about your specific tax situation, please consult your tax advisor.

    Q: If I withdraw money from my Traditional IRA before age 59½, do I pay a penalty?
    A: In general, you must pay a 10% tax on withdrawals before age 59½. But the early withdrawal tax does not apply in the following situations:

    • Amount is rolled over or directly transferred to another Traditional IRA
    • Amount is properly converted to a Roth IRA
    • Withdrawal of a contribution before the early withdrawal deadline
    • Withdrawal of an excess contribution after the filing deadline if certain conditions are met
    • Payment is made to your beneficiaries after your death
    • Withdrawal of up to $10,000 for a first-time home purchase
    • Amount is used to pay for qualified post-secondary education expenses
    • Amount is used to pay for medical expenses in excess of 7.5% of Adjusted Gross Income (AGI)
    • Amount is for qualifying pre-59½ periodic payments
    • Distribution is to an owner who is disabled (as defined by the IRA code)
    • Distribution is for medical insurance premiums during unemployment that lasts 12 weeks or longer
    • Payment of federal tax levy

    Q: What about income taxes when I withdraw from my Traditional IRA?
    A: You will owe income taxes when you withdraw from your Traditional IRA. However, if you make nondeductible contributions to a Traditional IRA or roll over nondeductible contributions you made to a qualified retirement plan, a portion of each withdrawal will be treated as the nontaxable return of these contributions.

    Q: When must I begin receiving distributions from my Traditional IRA?
    A: You must begin receiving required minimum distributions each year will be computed using an IRS formula. You are allowed to delay the first year’s payment until April 1 of the following year, but you will receive two years’ worth of payments in that year if you choose to delay.

    Q: Can I move funds from a traditional qualified retirement plan to a Traditional IRA?
    A: If you are entitled to receive an eligible rollover distribution from an employer’s plan, you can continue deferring taxes by moving the money into a Traditional IRA. The best way to do this is to inform the plan administrator that you want the funds moved directly to your Traditional IRA as a direct rollover.

    Q: Can I move money from a Traditional IRA to a Roth IRA?
    A: You can move money from your Traditional IRA to a Roth IRA if you meet defined income limits and you are either single or married and filing a joint tax return. In the year you convert, you will have to pay federal income taxes on the amount that you move, except the portion that is treated as the return of your Traditional IRA basis. You may also be subject to state income taxes. Starting in 2010, anyone with a Traditional IRA can convert it into a Roth IRA. And you can spread the taxable income resulting from conversions made in 2010 over 2011 and 2012, rather than paying the tax in 2010.

    Q: What happens to my Traditional IRA after my death?
    A: you may designate one or more beneficiaries to receive your IRA after your death. If your spouse is your beneficiary, he or she may directly transfer your Traditional IRA tax-free. Beneficiaries have the option of taking a lump-sum payment or periodic payments over a number of years. Tax-deferred money in your Traditional IRA at the time of death will be taxed when it is distributed to your beneficiaries. Contact your financial professional regarding your individual circumstances.


BulletRoth IRA: Answers to Your Questions

  • The flexibility you need, the benefits you want.

Roth IRAs give many members an easy and safe way to plan for the future.

With a Roth IRA:

  • Contributions are allowed at any age
  • Qualified distributions are tax-free
  • Flexible withdrawal options are available

Is the Traditional IRA for you?
Below is a list of the most frequently asked questions about Roth IRAs. If you still have questions, give us a call or stop in and will be happy to help you find the answers.

Q: What is a Roth IRA?
A: A Roth IRA is an individual retirement account created by the Taxpayer Relief Act of 1997. Named for the late Senate Finance Committee Chairman William Roth, Jr.

Q: How does Roth IRA work?
A: Unlike a Traditional IRAs, contributions to a Roth IRA are never tax-deductible. However, the money in your Roth IRA, including earnings, can be withdrawn tax-free. Of course, you must conform to certain tax requirements to get this tax-free advantage.

Q: Am I eligible to contribute to a Roth IRA?
A: You are eligible for if your income is less than a limit set by Congress and you earn compensation (or your spouse earns compensations and you file a joint return). If your income is too high to contribute the annual contribution limit, you may be able to make a smaller contribution. Heck with a tax professional for current figures.

Q: How much is the annual contribution limit?
A: The annual contribution limit for someone under age 50 is $5,000. The annual contribution limit for someone age 50 or older is $6,000.

Q: Can I still contribute to a Roth IRA if I participate in an employer-sponsored retirement plan?
A: Yes, and you can contribute past age 70½, as long as you continue to earn compensation.

Q: Will my Roth IRA affect the amount that I can contribute to my employer-sponsored retirement plan?
A: No. The amount you contribute to your 401(k) or other employer-sponsored retirement plan will not be affected by your Roth IRA.

Q: Can I have both a Traditional IRA and Roth IRA?
A: Yes, you can contribute to both types of IRAs for the same year. But the total of the contributions that you make both types of IRAs for the same year cannot exceed your contribution limit for that year.

Q: When can I start taking tax-free distributions from my Roth IRA?
A: You can withdraw regular contributions without paying income tax at any time. Distributions are treated as first being attributable to your regular contributions until all of your regular contributions have been distributed. 

There are two requirements to qualify for tax-free withdrawals of the income your Roth IRA has earned. First, your Roth IRA must meet the “five-year test.” In other words, it must be five years after the first year for which Roth contributions were made. Second, one of the following conditions must apply:

  • You are over age 59½
  • Funds are going to your beneficiary upon your death
  • You have become disabled
  • You are using the funds for a first-time home purchase (lifetime limit is $10,000 per person)

Q: What if I make a withdrawal from my Roth IRA and I am not age 59½ or covered by any exceptions?
A: Unless an exception applies, earnings distributed before age 59½ are subject to the 10% early distribution tax. A distribution of an IRA or QRP conversion contribution is also subject to this 10% tax during the first five years after it was made.

Q: Do I have to receive minimum distributions when I reach age 70½ ?
A: No. You are not required to start receiving minimum distributions when you reach age 70½. If you don’t need the cash, you can let your money continue to grow tax-free for as long as you like. However, minimum distributions must be made to your beneficiaries following your death.

Q: Can I roll over funds from one Roth IRA to another Roth IRA?
A: Yes. A rollover or direct transfer from one Roth IRA to another Roth IRA is tax-free and can be made regardless of your MAGI.

Q: What should I do if I am eligible to contribute both a Roth IRA and my company retirement plan, but I don’t have enough money to contribute the maximum to both?
A: Experts recommend that you first contribute at least enough to your company plan to take full advantage of any employer match. After getting the full employer match, the approach varies, depending on your circumstances. Consult with a tax professional if you are unsure.   

Q: does it make sense to make an after-tax voluntary contribution to my company retirement plan instead of a Roth contribution?
A: No, the tax benefits from making a Roth IRA contribution equal or exceed those from making an after-tax voluntary contribution.

Q: Does it make sense to make a nondeductible contribution to a Traditional IRA instead of a Roth contribution?
A: No, the tax benefits from making a Roth IRA contribution equal or exceed those from making a Traditional IRA contribution.

Q: What if I can deduct a contribution to a Traditional IRA?
A: In general, a person who can afford to make the maximum Roth IRA contribution will benefit more from making Roth IRA contributions. This may not be true if you are close to retirement and it appears that your tax bracket will go down substantially after retirement. You should also consider a deductible Traditional IRA contribution if losing the deduction would reduce the amount you can contribute. Seek tax advice if you are in doubt.

Q: Can my Roth IRA be inherited?
A: Yes. Upon your death, the entire proceeds are passed on tax-free to your beneficiaries, once the five-year test has been met. This means your beneficiaries can avoid all taxes by waiting until the end of the five-year period before receiving the earnings portion of the account.

Q: How will I know if I am a good candidate to convert my Traditional IRA to a Roth IRA?
A: The desirability will differ with each individual’s financial circumstances. Because this decision is a complicated one, you should consult a tax professional. Consider several key questions:

  • Would most of the funds in your Traditional IRA be subject to income tax in the conversion?
  • Can you afford to pay the income taxes due on the conversion from funds outside of your IRA funds?
  • What tax bracket are you in now, and what tax bracket do you think you will be in when you retire?
  • How long is it before you retire?
  • Is the Roth IRA useful to you as an estate planning tool?

Note: Any Traditional IRA owner can make an IRA conversion contribution to a Roth IRA, and any qualified retirement plan (QRP) participant can make a QRP conversion contribution to a Roth IRA. This new rule also applies to IRA conversion contributions. For 2010 conversions, the contribution will not be taxed in 2010, but instead will be split evenly over 2011 and 2012.

Q: I know about the federal taxes due on Roth accounts, but what about state taxes?
A: In many states, treatment of the Roth IRA for state tax purposes is the same as the treatment of the account for federal tax purposes by the IRS. Consult your tax adviser for more information on state taxes for the Roth IRA.

 

USECU is not at liberty to give tax advice, please see your tax advisor or tax accountant. 

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