Mutual Fund Education Alliance - Investment Strategies

A Traditional IRA can be opened by anyone with earned income who is under 70� at the end of the year. The Roth IRA can be opened by anyone with earned income, regardless of age, if their adjusted gross income meets the limits outlined in Table 2.

In addition, non-working spouses can also open either a Traditional or Roth IRA at the same contribution levels. They can also take advantage of the same catch-up provision if they are age 50 or over.

Both Roth and Traditional IRAs have the same maximum contribution limits as outlined in Table 1. If you're age 50 or over, a "catch-up" provision allows you to contribute $500 more each year to either a Roth or Traditional IRA. This extra savings opportunity for those 50+ increases to $1,000 in 2006.

Yes, but how it affects your contributions depends upon the type of IRA you are investing in.

The Roth IRA has phase out levels for contributions as outlined below. If your Adjusted Gross Income is above $110,000 in 2006 or $114,000 in 2007 (singles) or $160,000 in 2006 and $166,000 in 2007 (couples) no contributions can be made to a Roth IRA. However, a contribution can still be made to a Traditional IRA. If you participate in an employer sponsored retirement plan you may lose the deductibility of a Traditional IRA at higher income levels.

Table 2.
Modified Adjusted Gross Income (MAGI) Limits For Contributions to a Roth IRA
MAGI Limits	Single	Married, Filing Jointly
Full contribution at AGI of:	$95,000 or below (2006) $99,000 or below (2007)	$150,000 or below (2006) $156,000 or below (2007)
Partial contribution:	$95,001 - $110,000 (2006) $99,001 - $114,000 (2007)	$150,001 - $160,000 (2006) $156,001 - $166,000 (2007)
No contribution at AGI of:	$110,001 (2006) $114,001 (2007)	$160,001 (2006) $166,001 (2007)

As long as you have earned income and you meet the age requirements, you can always make a contribution to a Traditional IRA. But, if you or your spouse is a participant in an employer sponsored retirement plan, your income level will determine whether your contribution is tax-deductible.

Table 3.
Modified Adjusted Gross Income (MAGI) Limits For Deductible Contributions to a Traditional IRA
AGI Limits	Singles	Couples
Fully deductible contribution:	$50,000 (2006) $52,000 (2007)	$75,000 (2006) $83,000 (2007)
Partially deductible contribution at:	$50,001 - $60,000 (2006) $52,001 - $62,000 (2007)	$75,001 - $85,000 (2006) $83,001 - $103,000 (2007)
No deductible contribution above	$60,000 (2006) $62,000 (2007)	$85,000 (2006) $103,000 (2007)
If your income is too high to qualify for tax-deductible contributions, you still may make non-deductible IRA contributions.

Contributions to a Roth IRA are not deductible.

Contributions to a Traditional IRA may be deductible depending on your income level, filing status and whether you are participating in another tax sheltered retirement plan (see Table 3 above).

Yes, as long as the total amount of your contributions does not exceed the maximum contribution levels (see Table 1).

Since contributions to a Roth IRA are not tax-deductible, the withdrawals are tax-free. For Traditional IRAs, the distributions are taxed as ordinary income if they were tax-deductible contributions when you made them.

Absolutely. Participation in an employer-sponsored plan may limit the deductibility of your Traditional IRA contribution, however you may still contribute to an IRA. Depending upon your income (see Table 3), the contribution may be fully or partially deductible, or you may be able to make a nondeductible contribution to a Traditional or Roth IRA.

A non-working spouse may make a fully deductible contribution to an IRA, even if his/her spouse participates in an employer-sponsored retirement plan. A family�s adjusted gross income must be less than $150,000 in 2006 or $156,000 in 2007 to be fully deductible.

That's a difficult question, and one you should review thoroughly with your tax advisor. The answer depends on several things, including how far away you are from retiring, how much untaxed earnings and contributions you have in your traditional IRA and how soon you want to start withdrawing money from your IRA. If you convert money over to a Roth IRA, there is no 10% penalty, but you owe taxes on any contributions and earnings. However, there are no minimum distribution requirements for Roth IRAs, and you may contribute to a Roth IRA for as long as you want, provided you have compensation.

If I couldn't deduct my Traditional IRA contribution, why would I consider using the Traditional IRA over the Roth IRA?

If you cannot deduct your Traditional IRA, and you fall under the maximum income limitation, you should always go with a Roth. If your income is above the level that permits a Roth contribution, the Traditional IRA (with either a deductible or nondeductible contribution) is your only option. Even if you can't deduct the contribution, the Traditional IRA still gives you tax-deferred growth: a powerful incentive.

How does a penalty-free withdrawal work if I'm purchasing a first home for my parent or child?

If you are the buyer, to qualify for a penalty-free withdrawal, you cannot have owned a home for the previous two years.

For a Traditional IRA, there is a 10% early withdrawal penalty if you take a distribution before age 59 1/2. This penalty will not apply if the distribution is used for paying college expenses or for a first time home purchase up to $10,000. You may also have to pay taxes on the distribution, depending upon whether the contribution was tax-deductible.

For a Traditional IRA, you must begin to withdraw a certain minimum amount annually by April 1 following the year in which you reach age 70�. You can hold distributions to a minimum by spreading them over your lifetime or over the joint lifetime of you and your beneficiary. A great advantage of taking only limited distributions is that the balance not withdrawn continues to earn and compound tax-deferred.

To qualify for a penalty-free and tax-free distribution under a Roth IRA, the account must be held for at least 5 years. In addition to the 5-year holding rule, penalty-free and tax-free distributions may be made at age 59 1/2, and early withdrawals (before age 59 1/2) may be taken penalty-free and tax-free if the money pays for a first time home purchase (up to $10,000). There is no required minimum distribution for a Roth IRA.

You may only convert to a Roth IRA if you're single or married filing jointly and your adjusted gross income is less than $100,000. If you are married and filing separately, you cannot convert to a Roth.

The adjusted gross income limit is repealed for 2010 and later years. For conversions in 2010, the amount includible in gross income as a result of the conversion will generally be included in income, half in 2011 and half in 2012.

You will pay income taxes in the year you make the conversion, just as if it were a distribution from an IRA. But there are no penalties on a conversion.

You may continue contributions but they will be held in a separate account known as a contributory Roth IRA. So once you convert, you could actually have 2 new accounts: a Roth and a Roth Contributory IRA.

The answer is not clear for all states. Most states follow the federal rules for determining taxable income, so it will not be subject to income tax in those states. Other states define taxable income without regard to federal rules. Of these states, so far only California has issued a position. You should seek the advice of your tax advisor on this issue.

What if my income ends up exceeding the $100,000 limit to be eligible to convert my traditional IRA to a Roth IRA, and I have already converted to a Roth IRA?

You may "reverse" the conversion by "recharacterizing" your Roth IRA to a traditional IRA. The Roth Conversion IRA (all contributions and income generated from the account) must be transferred to a traditional IRA before the due date of the individual's tax return for that year, including extensions. The transfer must be a trustee-to-trustee transfer, not a rollover.

Rollovers into Traditional IRAs already established with out-of-pocket contributions are permitted, however you may want to consider establishing a separate IRA to hold these assets.

A long as rollover amounts are not combined with out-of-pocket contributions, you maintain the ability to roll these assets into a new employer's retirement plan. Once combined, you can lose this option.

No. An IRA can be transferred directly from one custodian or trustee to another, without being distributed to the account-holder. Transfers can be done as often as desired without limitation, and it is the usual procedure when moving an IRA from one sponsor to another. With a rollover, on the other hand, the funds are actually distributed. The accountholder then has 60 days in which to invest the funds in another IRA without being liable for taxes on the money received. A rollover is permitted for an IRA only once every twelve months, and it is essential that the reinvestment be completed within 60 days.

Can distributions from an employer�s retirement plan be rolled over into an IRA?

Yes. Most distributions from qualified corporate retirement plans, Keogh plans and 403(b) plans can be rolled over into an IRA without owing income tax on the distribution, as long as the reinvestment is made within 60 days after receipt. A "rollover IRA" is usually kept separate and not combined with a regular IRA. The law permits your �rollover IRA� to be rolled over again at some later date into a new employer�s pension or profit sharing plan. But you are not allowed to do this if you have ever made regular IRA contributions into your "rollover IRA."

Once a distribution is taken from an IRA, you have 60 days from the time you receive the check to replace those funds and avoid any associated penalties or taxes. This type of rollover can be done only once every 365 days.

This IRA is also known as the Coverdell Education Savings Account and is used exclusively to pay education expenses. Similar to the Roth IRA, contributions are nondeductible, earnings accumulate tax-free, and qualified withdrawals are tax-free. The contribution limit is $2,000 per child. For more complete details, click here.

As long as the child has earned income, he or she can contribute to an IRA. It can be opened as a Traditional or Roth IRA, with the same maximum contribution as for an adult or 100% of earned income, whichever is less. To establish an IRA for a minor, the account must be opened and held by an adult, as guardian, in the name of the minor. While the adult is the individual authorized to perform transactions on the account, the minor is considered the registered owner for tax purposes.

The final deadline for making prior year IRA contributions is April 15. For example, a contribution for tax year 2006 may be made up until April 16, 2007.