Qs & As

Updated 7/07

What are the IRA contribution limits?

For tax years 2005 through 2007, you can put up to $4,000 per year into either a traditional or Roth IRA - or a combination of both. When tax year 2008-2010 rolls around, the maximum annual contribution will jump to $5,000. After that, limits will be adjusted in $500 increments annually for inflation.

Do I have to make the $4,000 maximum contribution to my traditional or Roth IRA?

No, that's simply the most you can put in per year, as of tax year 2005. But here's why you would want to contribute the maximum if you're eligible: Assume you put in $4,000 on January 1, each year and earned a 5% return. After 10 years, you'd have over $13,000 more than you would have had by contributing only $3,000 each year. And after 30 years, you'd have almost $70,000 more! That's a big difference in your retirement nest egg.

Keep in mind that to contribute the maximum $4,000 to a Roth IRA, you must fall within certain income limits: a modified adjusted gross income (MAGI) of up to $99,000 if you file a single tax return and a MAGI of up to $156,000 if you file jointly. But as long as you have earned compensation and you're under age 70½, you can always make the maximum contribution to a traditional IRA - regardless of your income. Your traditional IRA contributions may not be tax-deductible, but you still stand to gain from tax-deferred growth.

What is a "catch-up" IRA contribution, and am I eligible?

The name says it all - "catch-up" contributions are specifically designed to help those who are getting closer to retirement catch up on their retirement savings. You're eligible as long as you?re at least 50 years old during the year the contribution is for, and of course, as long as you meet the eligibility requirements for traditional or Roth IRAs.

Here's how they work: For tax years 2006 and on, you can put an extra $1,000 into your traditional or Roth IRA beyond the regular contribution limit. The bottom line is a lot more money for your retirement goals - in fact, almost $30,000 more if you contribute the maximum plus the catch-up contribution at the start of each year from age 50 to 70 and earn a 5% return.

Have the eligibility rules changed for Roth and traditional IRAs?

No. Despite all the changes to traditional and Roth IRA contribution limits due to recent tax legislation, the eligibility requirements are exactly the same. For either IRA, you must earn compensation or file a joint income tax return with a spouse who earns compensation. If you want to contribute to a traditional IRA, the only additional requirement is that you?re under age 70½ (although your income may affect whether or not your contributions are tax-deductible).

To contribute to a Roth IRA, you must fall within certain income limits: a modified adjusted gross income (MAGI) of up to $114,000 if you file a single tax return and a MAGI of up to $166,000 if you file jointly. Note that you?ll only be able to contribute the $4,000 maximum to a Roth IRA if your income is under $99,000 as a single filer or under $156,000 as a joint filer (above that, contributions are phased out).

I'm leaving my job. Can I roll my 457(b) plan into an IRA?

Starting in tax year 2002, the answer is yes - if it is a governmental 457(b) plan. You can also roll funds from 403(b)s and qualified retirement plans (QRPs) -- including 401(k)s -- into an IRA. Or you can roll the plan assets from any of these plans into each other. Likewise, IRA distributions will be eligible for rollover to QRPs, 457(b)s or 403(b)s.*

All of this is good news if you're receiving plan distributions due to a job change or retirement. It means more investment options and more payment options for your plan assets. And if you do a direct rollover (where the check is made out to your financial institution on behalf of the IRA), your funds won't be subject to taxes or penalties.

*The receiving plan must have terms that allow for a rollover to occur; some plans do not accept rollovers.

Who is eligible for the nonrefundable tax credit for making IRA contributions?

Starting in tax year 2002, you qualify for a nonrefundable tax credit for contributions you make to your IRA if you are a:

• Single filer with a modified adjusted gross income (MAGI) of $26,000 or less; or
• Head of household filer with MAGI of $39,000 or less; or
• Joint filer with MAGI of $52,000 or less.

The credit ranges from 0 - 50% of your contribution, depending on your MAGI, and the maximum annual contribution eligible for the credit is $2,000. This credit is in addition to any applicable deduction or exclusion. If you're under age 18, a full-time student, or claimed as a dependent on another person's tax return, you will not be eligible for the credit.

What's the difference between a Roth and traditional IRA?

With a traditional IRA, your contributions may be tax-deductible and earnings are tax-deferred, meaning you pay taxes on most IRA funds upon withdrawal. In contrast, Roth IRA contributions are always made with after-tax dollars, but qualified withdrawals are tax-free - including all your earnings!*

As for similarities, the aggregate contribution limit to either a Roth or traditional IRA is $4,000 per year, or 100% of your compensation (whichever is less). And both offer the flexibility to use the funds not only for retirement, but also for a first-time home purchase and higher-education expenses.

*Some withdrawals from traditional or Roth IRAs may be subject to additional penalties if they are taken improperly or at the wrong time. Please consult your tax adviser for additional information.

Can I contribute to an IRA if I already have a retirement plan through my employer?

Yes, you can contribute to a Roth IRA or a traditional IRA regardless of whether or not you have an employer-sponsored plan. In fact, IRAs are a great way to pad your savings.

While participation in a retirement plan doesn't change how much you can contribute to an IRA, it can affect whether or not you're eligible to deduct your contributions to a traditional IRA on your tax return. But keep in mind that as long as you're under age 70½ and you've earned compensation, you can always make nondeductible contributions to a traditional IRA and benefit from tax-deferred earnings.

What's a SEP plan?

A simplified employee pension (SEP) plan is exactly that - a simpler way for small businesses to offer a retirement plan to their employees. A SEP plan allows you, the employer, to make contributions to your own traditional IRA and those of your employees instead of establishing a complex retirement plan.

SEP plans are inexpensive and easy to administer. Plus, your employees pay no taxes on their SEP accounts until they withdraw their funds.

Why should I have an IRA at my credit union?

There's a lot more to having an IRA than just getting tax advantages. It's your future, the key to your goals. You'll never have to worry about taking chances with that future when your IRA is at the credit union. Your savings are secure, and your money will always be there when you need it. Here are the benefits of a credit union IRA:

• Competitive rates
• Insured deposits
• Payroll deduction to simplify contributions
• Low minimum deposit requirements
• Personalized answers to your questions
• One-stop shopping for all your financial services

Are IRAs only good for retirement planning?

IRAs are more flexible than they've ever been. They're no longer considered strictly retirement savings tools because they can also help you pay for college, medical expenses, health insurance premiums, a first-time home purchase, and more. Plus, with Roth IRAs, you can withdraw your regular contributions tax- and penalty-free at any time, for any reason!

Can my spouse and I both contribute to IRAs?

If you and your spouse want to put money into traditional or Roth IRAs, your contributions can total $8,000 or your combined compensation, whichever is less. But the maximum contribution for each spouse can't exceed $4,000 per year, so each spouse will need a separate IRA to contribute the full $8,000. If you don't earn compensation, but your spouse does, you still may be eligible to contribute to a traditional or Roth IRA based on your spouse's earnings.

Keep in mind that you must earn under $99,000 on a single tax return and under $156,000 on a joint tax return in order to contribute the full $4,000 to a Roth IRA. You can still make partial contributions to a Roth with income up to $114,000 as a single filer and $166,000 as a joint filer. While there's no age limit on contributions to Roth IRAs, you can't contribute to a traditional IRA for the year you reach age 70½ or later years. Also, there are some limitations on tax-deductible contributions to traditional IRAs.

Can I convert my traditional IRA to a Roth IRA?

There are only two disqualifiers for this type of conversion: 1) if you're married, filing separately, or 2) if your modified adjusted gross income (MAGI) in the year of the conversion is $100,000 or more. This limit is the same for both single filers and married couples who file jointly. Keep in mind that if you convert to a Roth IRA, you'll have to pay income taxes on your traditional IRA earnings and on any deductible contributions you've made to that IRA.

Sometimes a better question than "Can I convert?" is "Should I convert?" For many, the Roth IRA?s tax-free earning potential is well worth the conversion, but it's a good idea to check with a tax adviser before you make your decision.

Do I have to start withdrawing money from a Roth IRA at any certain age?

No. Unlike traditional IRAs, there's nothing that requires you to start withdrawals from a Roth IRA when you reach age 70½. And as long as you're still earning compensation, you can keep putting money into a Roth IRA indefinitely. This flexibility lets you build your savings for future retirement years or even a gift to your loved ones - a gift that's free of income tax for qualified distributions.

Can I have both a traditional and a Roth IRA?

Yes, you can. But remember that you can only contribute up to $4,000 per year to any combination of traditional and Roth IRAs that you have. You can't contribute $4,000 to each.

Will my contributions to a traditional IRA be tax-deductible?

There are three factors that determine eligibility for tax-deductible contributions to a traditional IRA: income, participation in a retirement plan, and marital status. Check your eligibility below. The dollar amounts are for 2002, and they will keep getting higher until 2007.

Married? Your contributions are fully deductible if:

• Neither you nor your spouse have an employer retirement plan (regardless of income); or
• You have an employer retirement plan, but your joint tax return shows income of $53,000 or less; or
• Only your spouse has an employer retirement plan, and your joint tax return shows income of $150,000 or less.

Single? Your contributions are fully deductible if:

• You don't have an employer retirement plan (regardless of income); or
• You have an employer retirement plan, but your income is $33,000 or less.

Note: If your income exceeds the above limits, you may be able to make deductible contributions of less than the maximum.

How do I save money by rolling my pension plan payout into an IRA?

By cashing out your pension plan, you risk losing up to 50 cents on the dollar. This is because distributions from your plan payout are taxable, plus they're generally subject to a 10% penalty if you're under age 59½.

You can save money with a direct rollover to a traditional IRA at the credit union. A direct rollover differs from other rollovers in that the plan administrator sends the funds to the credit union on behalf of your IRA, not to you. As a result, you?re not subject to taxes and penalties - which means all of your money keeps compounding for your future, uninterrupted, in a tax-advantaged account.

Do I have to make my entire annual contribution to an IRA at one time?

If you wish, you certainly can put your whole year's contribution in at once. But you can make it a lot easier on your pocketbook with payroll deduction at the credit union. This convenient method spreads your IRA contribution over the entire year, helping you to save regularly and avoid the hit of a lump-sum payment.

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For more information, contact Member Services at (904) 723-6300 or email Member Services.

This article is not intended as tax advice. Please consult a tax professional regarding your specific circumstances.

Representatives are registered through, and securities are sold through, CUNA Brokerage Services, Inc. (CBSI), member NASD/SIPC, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (866) 512-6109. Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the credit union.