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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.
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The annual contribution limit is $5,000 in 2008. ($6,000 if you are age 50 or better.) After 2008, the contribution limit will be adjusted annually for inflation in $500 increments. 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.
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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can be withdrawn tax-free, and unlike traditional IRAs, you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.
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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 beginning
in 2006, the additional catch-up amount increases to $1,000.
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.
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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 |
2008 and after... $5,000* |
2008 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 |
Yes, if active participant in employer retirement plan. |
Yes, contributions phaseout between $95,000–$110,000
for singles and $150,000–$160,000 for married couples. |
Yes, if your Modified Adjusted Gross Income is between $95,000–$110,000
for singles and $190,000–$220,000 for married couples,
then contribution phaseout applies. |
| 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
2005 $50,000–$60,000
2006 same as 2005
2007 same as 2005
Married Couples
2005 $70,000–$80,000
2006 $75,000–$85,000
2007 $80,000–$100,000
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No. |
No. |
| Penalties for Early Withdrawal |
None if:
- Over 59½
- Death or disability
- Qualified medical expenses
- Certain health insurance
- Qualified college expenses
- !st time home purchase(up to $10,000)
- Due to IRS levy
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None if:
- Over 59½
- Death or disability
- Qualified medical expenses
- Certain health insurance
- Qualified college expenses
- !st time home purchase(up to $10,000)
- Due to IRS levy
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None if:
- For payment of qualified education expenses
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| 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 |
