IRAs (Traditional and Roth)

TRADITIONAL

Among the various choices for individual retirement arrangements , a traditional individual retirement account (IRA) is a domestic trust or custodial account that can be established by an individual in order to save money for retirement on a tax-deferred basis. Some contributions may also be deducted from your taxable income in the year of contribution.

A traditional IRA is an extremely versatile and simple way to save for retirement . It is often used by those with no other tax-favored way to save for retirement. A traditional IRA also serves as the funding method for retirement plans, like SEPs and SIMPLEs , used by small business owners and the self-employed. The beauty of an IRA is it is an extremely easy way to save for retirement, with virtually every type of financial institution standing ready, willing, and able to set one up for you.

Anyone who does not reach age 70.5 by the end of the year and receives taxable compensation during the year can set up and make contributions to an IRA. Compensation is generally what you earn from working and includes wages, salaries, tips, commissions, and net income from self-employment. Where spouses are concerned, compensation is pooled between spouses allowing both spouses to set up separate IRAs even if only one spouse is working. Although there is an upper age limit for participation, there is no minimum age requirement, however you should check with the financial institution for any company regulations.

ROTH

With a few important exceptions, a Roth individual retirement account (IRA) is essentially a nondeductible traditional IRA. Roth IRAs are also generally subject to the same rules as traditional IRAs. For example, the contribution limits for Roth IRAs and traditional IRAs (deductible and nondeductible) are equally $4,000 for 2005 through 2007, with an additional $500 contribution allowed for those age 50 and above in 2005 ($1,000 in 2006 and 2007).

Despite the many similarities, however, Roth IRAs do have a number of unique features and requirements that you should be aware of when choosing individual retirement arrangements . The most important ones are as follows:

• Qualified distributions from a Roth IRA are not includible in income and, therefore, tax-free.
• Contributions can be made to your Roth IRA regardless of your age.
• There are no required minimum distributions that must be made from a Roth IRA.
• Eligibility to contribute to a Roth IRA is subject to special limits.

Qualified distributions. To count as a qualified distribution, a Roth IRA distribution cannot be made before the end of the five-tax-year period beginning with the first tax year for which the individual (or the individual's spouse) made a contribution to the Roth IRA. In addition to the five-year holding period, a qualified distribution can only be made if it is:

• on or after the date the individual reaches age 59.5
• to a beneficiary or an individual's estate on or after the individual's death
• attributable to the individual being disabled
• used to pay for qualified first-time homebuyer expenses

Distributions that do not meet the above requirements are considered nonqualified distributions. The Roth IRA holder will owe income taxes on any earnings withdrawn. However, the 10 percent early withdrawal penalty tax that applies to traditional IRAs generally does not apply to Roth IRAs except in cases of failed conversions from a traditional IRA.

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