An Individual Retirement Account (IRA) is an excellent tool for retirement savings. Unlike most investments, depending on the type of IRA you choose, contributions may be tax deductible and will grow either tax-deferred or tax-free.

A Coverdell Education Savings Account (ESA) (formerly Education IRA) is a great way for parents, grandparents and others to help meet the rising costs of a student's education.

Recent tax law changes have made IRAs and ESAs even better.

Traditional IRA

The annual contribution limit is $5,000 in 2012. ($6,000 if you are age 50 or better.) The contribution limit will be adjusted annually for inflation. The annual limit applies to any combination of IRA plans other than the ESA Contributions are fully tax deductible if you are not an active participant in an employer retirement plan. Investments grow on a tax-deferred basis. Earnings are taxed only upon withdrawal.
 

Roth IRA

As long as you have earned income, you can establish and contribute to a Roth IRA even after age 70½. While contributions are not tax deductible, contributions and earnings can be withdrawn tax-free, and unlike traditional IRAs, you are not required to begin taking required minimum distributions after reaching age 70½. By converting your traditional IRA to a Roth IRA, you can enjoy tax-free withdrawals. However, the amount you convert is subject to income tax now.
 

Making-Up For Lost Time

Catch-up contributions—Individuals who have reached age 50 by the end of the year will be able to make additional catch-up contributions of $500 per year to their traditional or Roth IRA. For taxable years after 2006, the additional catch-up amount increases to $1,000.

Education Savings Account

The annual contribution amount has been increased from $500 per beneficiary to $2,000 per beneficiary. While there is no tax deduction for amounts contributed to a Coverdell Education Savings Account, earnings grow tax-free. And your ESA can be used to pay qualified elementary school and secondary school expenses as well as those for higher education.
 

The New Look of IRAs and ESAs
  Traditional IRA Roth IRA Coverdell ESA
(formerly Education IRA)
Qualifications Must have earned income and not have reached age 70½ by the end of the year. Must have earned income. There are no age restrictions. The designated beneficiary must be an individual under the age of 18. The age 18 limitation does not apply to any designated beneficiary with special needs.
Maximum Annual Contributions 2012 and after... $5,000* 2012 and after... $5,000* Taxable years beginning
In 2002 and after ...$2,000 per beneficiary
Contributions do not count against the limits for IRA's
Tax Status of Earnings Tax-deferred until withdrawal Not taxed. Earnings grow tax-free. Not taxed. Earnings grow tax-free.
Contribution Restrictions Please see a Bank North Rep today. Please see a Bank North Rep today. Please see a Bank North Rep today.
Tax Deduction Yes. Contributions up to the limit are fully tax deductible if you are not an active participant in a retirement plan. Otherwise phaseout rules apply.
Contribution Phaseouts
Singles with AGI
2012 More than $58,000 less than $68,000
Married Couples Filing Jointly with AGI
2012 More than $92,000 but less than $112,000
No. No.
Penalties for Early Withdrawal

None if:

  • Over 59½
  • Death or disability
  • Qualified medical expenses
  • Certain health insurance
  • Qualified college expenses
  • 1st time home purchase(up to $10,000)
  • Due to IRS levy

None if:

  • Over 59½
  • Death or disability
  • Qualified medical expenses
  • Certain health insurance
  • Qualified college expenses
  • 1st time home purchase(up to $10,000)
  • Due to IRS levy

 

None if:

  • For payment of qualified education expenses
Required Distributions Must begin by April following year participant turns 70½. Only after death of the participant. Must be complete 30 days after beneficiary reaches age 30 or dies. Beginning in 2002, the age 30 limit will not apply to any beneficiary with special needs.
Contributions After 70½ Not allowed. Allowed Allowed
*To be adjusted annually for inflation in $500 increments

Consult a tax advisor regarding income tax benefits, income tax deferrals or tax free withdrawals.