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Introduction | Traditional IRAs | Rollover IRAs | Roth IRAs | Trust Company IRAs | Trust as Beneficiary | New Contribution Limits
Individual Retirement Accounts (IRAs) are personal savings accounts that working people and their spouses can establish for the purpose of saving and investing for retirement. IRAs may also give you significant tax advantages, enabling your savings to potentially grow at a faster rate than it would in a comparable taxable account.
Withdrawals prior to age 59 ½ may incur a 10% IRS tax penalty.
 | If you have earned income and are under age 70 ½, you can make a contribution to a traditional IRA - and your contribution may be fully deductible |
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| If you and your spouse are not covered by a retirement plan at work, your traditional IRA contribution may be deductible |
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| If you have an employer sponsored plan, your ability to deduct your IRA contribution will depend on your income level |
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| Assets in the IRA grow tax-deferred |
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| Both deductible contributions and earnings on all contributions are taxed as ordinary income when they are withdrawn from the account |
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| Required minimum distributions must start once you have reached age 70 ½ |
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Withdrawals prior to age 59 ½ may incur a 10% IRS tax penalty.
When you retire or change jobs, you have many decisions to make, one of the most important being what to do with the assets you have accumulated in your company's pension and 401(k) plans. Many investors find that rolling over their retirement assets directly to an IRA is the smart choice.
A direct rollover allows you to roll over eligible distributions from your company's pension directly into an IRA. By directly rolling over your funds, you avoid current taxes and potential penalties while your savings continue to grow tax-deferred. You also avoid having to pay the mandatory 20% federal income tax withholding on distributions from qualified plans.
Withdrawals prior to age 59 ½ may incur a 10% IRS tax penalty.
Roth IRAs are open to individuals with earned income, even if they are over age 70 ½. However, you must have an Adjusted Gross Income (AGI) below the threshold in order to be eligible to make the contributions. Eligibility to make a Roth contribution phases out for individuals with an AGI between $95,000 and $110,000, and for married couples filing jointly with an AGI between $150,000 and $160,000.
Contributions made to a Roth IRA are never tax deductible, but qualified distributions from the Roth IRA—including distributions of never-taxed earnings may be completely tax free! Plus, there are no required distributions during the account owner's lifetime.
Restrictions applies. Please consult your tax adviser for your specific situations.
Trust Company IRAs can provide unique services and functions to IRA owners with sophisticated estate plans. Trust companies provide a higher level of personalized service and oversight than is possible with custodial IRAs offered by banks and brokerage firms. You may wish to consider a Trust Company IRA if your estate plan includes any of the following strategies:
| The use of trusts as primary or contingent beneficiaries |
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| Second spouse with children from a first marriage |
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| A spouse beneficiary who is not a United States citizen or is not a resident |
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| Managing assets for the benefit of a special-needs person |
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| Charitable trust dispositions |
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Using a Trust as a Beneficiary
The Internal Revenue Service permits the use of revocable trusts (that become irrevocable at the death of the account holder) as designated IRA beneficiaries. This option is very useful to individuals whose wealth is concentrated in their retirement plans and IRAs. If this is your situation, a key challenge is how to take full advantage of your personal federal estate and gift applicable exclusion amount. As of 2004, this exclusion allows you to pass as much as $1,500,000 of assets without federal gift or estate tax to whomever you wish. This exclusion amount is scheduled to increase to $3.5 million by 2009.
Payment of estate and annual income taxes
If you would like to pass your IRA to a beneficiary without it being reduced by estate tax, you may wish to specify in your will that non-IRA assets should be used to pay estate taxes (so long as the marital deduction is not reduced). You can provide the needed cash to pay your estate tax without tapping your IRA by purchasing either a single life or second-to-die life insurance policy. If you are over 70 ½ you may opt to use part or all of your required minimum distribution from the IRA to pay the annual premiums.
To further leverage your dollars, you may consider implementing a strategy within an irrevocable life insurance trust. If structured properly, distributions through the trust may be completely income- and estate tax free.
The "Dynasty IRA" Stretches Tax-Deferred Growth to the Maximum
A planning concept that is gaining popularity is known as the "Dynasty IRA." This type of IRA election allows your traditional or Roth IRA to be inherited by children, grandchildren or even great-grandchildren. Upon your death, your beneficiary's actual life expectancy would determine a new, much prolonged, schedule of annual payments. This means that more of your IRA stays income-tax-deferred for an extended period, greatly increasing the opportunity for tax-deferred growth, and the potential value of the IRA to your beneficiaries. However, the value of the IRA is included in your estate for state and federal estate tax purposes.
If the "Dynasty IRA" is an option for you, you need to be sure that young beneficiaries have professional guidance for their investments and that the terms of the IRA are administered correctly over many years. A Trust Company IRA may be the ideal vehicle to structure the "Dynasty IRA".
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 creates real opportunity for you to save even more for your retirement in a number of tax-advantaged ways.
Increased dollar contribution limits. The days of the $2,000 annual contribution are gone. In 2004, the annual contribution limit for both Traditional and Roth IRAs is $3,000. This limit will continue to increase in increments beginning in 2005, reaching a $5,000 annual contribution limit in 2008.
Catch up contributions. If you are 50 years old or older, you can contribute even more to your IRA on an annual basis. Catch-up contributions allow individuals who attain age 50 to contribute an additional $500 to their IRA—a total of $3,500 for those individuals in 2002. The catch-up contribution increases to $1,000 in later years.
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