Personal Accounts

Individual Retirement Account (IRA)

ABC's of an IRA - Traditional vs. ROTH

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  1. What are the main differences?

    Traditional IRA

    Offers a tax benefit presently (contributions may be tax-deductible)

    ROTH IRA

    Offers a tax benefit in the future (withdraws may be tax-free in retirement)

  2. Who generally uses each?

    Traditional IRA

    Those looking for a tax break at the present time or anticipate being in a lower tax bracket in retirement.

    ROTH IRA

    Those in a lower tax bracket now and are looking for future tax benefits.

  3. Is it tax deductible?

    Traditional IRA

    Yes, but does have income limitations. Deductions will also decline if you participate in a retirement plan.

    ROTH IRA

    No.

  4. Who can contribute?

    Traditional IRA

    Anyone under the age of 70½ can contribute to an IRA.

    No income limitation.

    ROTH IRA

    For 2016:

    • $6,500 if you are over 50
    • $5,500 of you are under 50

    * Income restrictions apply

  5. What are the advantages?

    Traditional IRA
    • Helps your money grow faster because there are no tax deductions.
    • Contributions are tax-deferred until distribution when they will be taxed as income.
    • You can deduct your contributions if you do not participate in a retirement plan or you meet income requirements. This option may reduce your current taxes.
    ROTH IRA
    • At retirement, your money is tax free.
    • Contributions are not deductible but you may withdraw funds free of tax or penalty.
    • There are no required minimum distributions. The money can stay in the IRA until you need it.
  6. What are the disadvantages?

    Traditional IRA

    Once you reach age 70½, you must start taking distributions and can no longer make contributions.

    Eligibility is limited by income.

    ROTH IRA

    There is no immediate tax benefit.

    Eligibility is limited by income.

  7. Is there a penalty for withdrawals?

    Traditional IRA

    Withdrawals made before age 59½ may be subject to a 10% penalty tax.

    Withdrawals can be made penalty-free prior to age 59½ if used for first home purchase or higher education.

    ROTH IRA

    Withdrawals are tax free if account has been open for at least 5 years.

    If over the age of 59½ withdrawals are penalty free

  8. What is the maximum contribution?

    Traditional IRA

    For 2015:
    Age 50 and under - $5,500
    Over age 50 - $6,500

    For 2016:
    Age 50 and under - $5,500
    Over age 50 - $6,500

    ROTH IRA

    For 2015:
    Age 50 and under - $5,500
    Over age 50 - $6,500

    For 2016:
    Age 50 and under - $5,500
    Over age 50 - $6,500

  9. When is the deadline?

    Traditional IRA
    April 15th is the cut-off date for the previous year.
    ROTH IRA
    April 15th is the cut-off date for the previous year.

FAQs - Simple IRA

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  1. What is a Simple IRA plan?

    A Simple IRA provides small business owners a way to contribute toward their employees’ retirement. It can work in two ways:

    1. By making a salary reduction and the employer makes matching deposits.

    2. By making a non-elective contribution.

  2. What qualifies you as a small business owner?

    To qualify for a Simple IRA an employer must have no more than 100 employees who earn $5,000 or more in compensation per year. This may also include self-employed individuals.

  3. What are the advantages of a Simple IRA?

    A Simple IRA is tax-deferred retirement plan. It also benefits the employer with tax deductions for both employee deferrals and their matching contributions.

  4. Is there a specific time when the account should be set up?

    A Simple IRA can be set up on any date between January 1 and October 1.

  5. Can I "opt out" of an employer's Simple IRA plan?

    You cannot “opt out” of an employer's Simple IRA.  However, you can choose to not make salary reductions.  By choosing to not make salary reductions, you would be allowing no matching employer contributions to your Simple IRA.  Rather, if your plan allows, you would be allowing only non-elective contributions to your Simple IRA.

  6. Is there an annual limit on the amount of salary reduction I can contribute?

    Yes. The annual amount made on behalf of any employee is $12,500 for the year 2016. If you are age 50 or over you can make catch-up contributions of up to $3,000 per year.

  7. Is the employer required to make matching contributions?

    Yes. The employer must match each employee’s salary reduction contributions (this also includes catch-up contributions) but it is limited to 3 percent of the employee’s compensation for the year. (An employer can reduce the 3 percent with some provisions).

  8. Can employers make non-elective contributions instead of matching contribution?

    Yes. Non-elective contributions can be made equaling 2 percent of each employee’s compensation. If an employer chose’s this route they must contribute to each employee’s IRA regardless of whether the employee is making salary reductions.

FAQs - Educational/Coverdell IRA

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  1. What is an Educational IRA?

    An Educational IRA is a trust created to help a designated beneficiary pay for qualified educational expenses. It provides a potentially tax-free way to save for future educational expenses.

  2. What are the requirements for obtaining an Educational IRA?

    The following are the requirements:

    • Single parents must have an annual gross income of less than $110,000.
    • Married couples must have a joint annual gross income of less than $220,000.
    • A date-of-birth, social security number, and address must be provided for the stated beneficiary.
    • The Educational IRA must be set up in the child’s name.
    • The child must be under the age of 18.
  3. Who controls the account if it is in the child's name?

    A parent or legal guardian of the child has control over the account while the child is still under the age of 18. When the child becomes 18, they can become owner of the account.

  4. How much can be contributed to the account each year?

    The maximum amount that can be contributed each year is $2000. After the child turns 18, contributions can no longer be made.

  5. What is the deadline to make a contribution for the year?

    The deadline for contributions is the same as the tax return date: April 15 for the previous year (not including extensions).

  6. What happens to the remaining funds after the beneficiary has completed their education?

    Funds remaining in the account can be withdrawn or put into another Educational IRA without penalty. If the funds are removed for an unqualified educational expense they will be subject to both income tax and an additional 10 percent tax.

  7. Can funds be kept in the account if they are not used?

    No. When the beneficiary reaches age 30, the remaining funds must be withdrawn by June 1 of the following year.

  8. What would be considered as a "qualified educational expense"?

    Qualified educational expenses would include but not be limited to:

    • College/University
    • Vocational schools
    • Almost all public, nonprofit and proprietary institutions
    • Elementary and secondary education
    • Books, computers, notebooks, etc.
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