IRAs

An Individual Retirement Account (IRA) is a personal savings plan that provides income tax advantages to individual saving money for retirement.

You invest money in an IRA by making “contributions” up to the amounts allowable under the tax law. In many instances an income tax reduction is available for the tax year for which the funds are contributed. (For 2008 tax year contributions can be made up to April 15, 2009) The contributions, as well as the earnings from these contributions, accumulate tax-free until you withdraw the money from the account.

Any individual can open and make contributions to an IRA, as long as you or your spouse (if you file jointly) received taxable earned contribution, during the year and you were not 70 1/2 years old (for Traditional IRA) by the end of the year.

Choosing the Right IRA

Should you open a Roth IRA? A Traditional IRA? Or put a little in both? Generally speaking, a Traditional IRA can be beneficial if you’re eligible to make deductible contributions and you expect your tax rate during retirement to be lower than it is today.

On the other hand, a Roth IRA may be a wise choice if you expect your tax rate to be the same or higher during retirement. The answer really depends on your unique situation. Review the table below to compare your IRA choices, and then contact an Iowa Falls State Bank Personal Banker to help you choose an IRA that is right for you.

Compare Your IRA Choices1

Traditional IRA

Roth IRA

How much can I contribute?

$5,000 +$1000 catch up (age 50 and older by 12/31 of the contribution year)

100% of taxable compensation up to $5,000 ($6,000 if eligible for a catch up contribution) reduced by Roth IRA contributions)

$5,000 + $1000 catch up (age 50 and older by 12/31 of the contribution year)

100% of taxable compensation up to $5,000 (($6,000 if eligible for a catch up contribution) reduced by Traditional IRA contributions)

Who is eligible?

Anyone with taxable compensation who is under age 70 1/2 in the contribution year, regardless of income level.

The contribution limit is phased out for those individuals who have a Modified Adjusted Gross Income (MAGI) between $101,000 and $116,000 (single) and $159,000 and $169,000 (married, filing jointly).

What are the tax advantages?

Tax-deferred2
You’ll receive tax-deferred2 investment growth and a possible tax deduction for contributions. You won’t pay taxes on deductible contributions or any earnings until you withdraw money.

Tax-free3
You’ll get tax-free3 investment growth if you maintained the account for five years and met certain withdrawal requirements.

Is my contribution tax deductible?

Yes
If you’re covered by an employer-
sponsored retirement plan, 2008 tax year contributions are fully deductible if your Modified Adjusted Gross Income (MAGI) is below $53,000 (single) and $85,000 (married filing jointly). You’ll get a partial deduction if your income is between $52,000-62,000 (single) and $85,000-105,000 (married, filing jointly).

If you’re covered by an employer- sponsored retirement plan, but your spouse isn’t, you can take a deduction for the contribution made to your spouse's IRA. Deduction is phased out for joint MAGI between $159,000 and $169,000. If neither spouse is covered by an employer-
sponsored plan, the contributions are fully tax-deductible, regardless of income level.

No
Your contribution is not tax-deductible.

Is there an age limit for contributions?

Yes
You must be under age 70 1/2 in the contribution year to contribute.

No

Are rollovers and transfers permitted?

Yes
You may roll over or transfer to and from other Traditional IRAs. You may rollover from qualified employee-sponsored plans. You may convert to a Roth IRA (if total MAGI, in the conversion year, is not more than $100,000 – for single and married, filing jointly). For tax years beginning after 2009 the $100,000 MAGI limit and the joint filing requirement for married individuals will no longer apply. Taxes must be paid on deductible contributions and all earnings when a Traditional IRA is converted to a Roth IRA.

Yes
You may convert a Traditional IRA to a Roth IRA (if Modified Adjusted Gross Income, in the conversion year, is not more than $100,000 – for single and married, filing jointly). For tax years beginning after 2009 the $100,000 MAGI limit and the joint filing requirement for married individuals will no longer apply. Taxes must be paid on deductible contributions and all earnings when a Traditional IRA is converted to a Roth IRA.

What are the withdrawal rules?

Withdrawals you make before you turn 59 1/2 are generally subject to a 10% IRS penalty.
You can make certain withdrawals free of IRS penalties before you turn 59 1/2, including withdrawals to help pay for a first time home purchase ($10,000 lifetime cap) or for qualified higher education expenses (taxes apply to all earnings and all deductible contributions withdrawn).
Distributions must begin by April 1 of the calendar year following the year you turn 70 1/2.

Qualified withdrawals of earnings are tax-free.3  Qualified withdrawals are those taken after the Roth IRA has been opened and funded for at least 5 years and the withdrawal is made: at age 59 1/2 or older, or upon death or disability (as defined by the IRS), or for a first time home purchase ($10,000 lifetime cap). Withdrawals of Roth contributions at any time are tax and IRS penalty free. Similar to Traditional IRA rules, withdrawals for qualified higher education expenses and first time home purchase are free of IRS penalties, even though they are not considered qualified withdrawals for purposes of taxation.

1Information provided is as of December 2008.

2Tax-deferred growth means the individual delays paying federal taxes on earnings until money is withdrawn from the IRA.

3Tax-free means free from federal income tax