A Look at the 3 Types of IRAs

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Table of Contents

Traditional IRA
Roth IRA
Stretch IRA
Questions and Answers

Traditional IRA

You can set up and make contributions to a traditional IRA if:

• You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
• You were not age 70 ^1/2 by the end of the year.

You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan.

Contributions: The most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

• $4,000 ($5,000 if you are age 50 or older), or
• Your taxable compensation for the year.

Income Eligibility: For 2007, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

• More than $83,000 but less than $103,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $52,000 but less than $62,000 for a single individual or head of household, or
• Less than $10,000 for a married individual filing a separate return.

For 2007, if you are not covered by a retirement plan at work, your deduction for contributions to a traditional IRA may be reduced (phased out) if you either live with your spouse at any time during 2007 or file a joint return for 2007. If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you are not, your deduction is phased out if your adjusted gross income (AGI) is more than $156,000 but less than $166,000. If your AGI is $166,000 or more, you cannot take a deduction for contributions to a traditional IRA.

Tax Treatment: All or part of contributions may be deductible, depending on income and filing status. Earnings accumulate tax deferred until withdrawn, and are subject to income taxation at the time of distribution.

Distributions: 10% early withdrawal penalty applies, unless distribution is made upon attainment of age 59 ^1/2, disability, death, for certain medical expenses, for qualified higher education expenses, or for first-time home buyer expenses (up to $10,000); and withdrawals that are part of a series of substantially equal payments. Distributions of earnings and deductible contributions are taxed as ordinary income.

Minimum distributions are required beginning April 1 of the year following attainment of age 70 ^1/2.

Roth IRA

Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified Adjusted Gross Income (AGI) is less than:

• $166,000 for married filing jointly or qualifying widow(er),
• $10,000 for married filing separately and you lived with your spouse at any time during the year, and
• $114,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year.

Contributions: If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of:

• $4,000 ($5,000 if you are age 50 or older), or
• Your taxable compensation.

Income Eligibility: For 2007, your Roth IRA contribution limit is reduced (phased out) in the following situations.

• Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $156,000. You cannot make a Roth IRA contribution if your modified AGI is $166,000 or more.
• Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

Your filing situation is different than either of those described above and your modified AGI is at least $99,000. You cannot make a Roth IRA contribution if your modified AGI is $114,000 or more.

Tax Treatment: Contributions are not deductible, but earnings accumulate tax-deferred, and qualified distributions are free from federal income taxes.

Distributions: Contributions may be withdrawn without federal income taxes or penalties.¹ Earnings may be withdrawn after five taxable years in the account and as of age 59^1/2, disability, death, and up to $10,000 may be withdrawn for first-time home buyer expenses. Such qualified distributions are federally tax free. Earnings withdrawn for higher-education expenses are taxed as ordinary income but are not subject to a 10% early withdrawal penalty. Minimum distributions are not required during the owner's lifetime.

¹ Withdrawals from Roth IRAs converted from Traditional IRAs will be subject to an early withdrawal penalty within five years of conversion (excluding any converted nondeductible contributions).

Stretch IRA

A stretch IRA is a distribution strategy that can extend the tax-deferred compounding of your IRA assets across multiple generations.

If you do not need all the assets in your IRA to cover your expenses in retirement, consider the stretch IRA strategy. This strategy can "stretch" the time during which the IRA's assets grow tax-deferred.

The rules let you determine your minimum distribution each year, based on your current age and account balance. The new distribution schedule is based on the joint life expectancies of you and a survivor who's at least 10 years younger. It assumes that both begin receiving distributions beginning at age 70.

These new rules also allow you to determine your beneficiary up to your death, and to select a beneficiary more than 10 years younger than you. These moves are what combine to reduce current minimum distribution requirements and extend the deferral period.

Questions and Answers