Traditional IRA
Roth IRA Accounts

Traditional IRA

A Traditional IRA is a retirement plan that allows you to contribute up to $4,000 annually or 100% of your earned income, whichever is less, to a tax-favored retirement account.1

What about my non-working spouse?

Up to $8,000 ($10,000 if both spouses qualify for catch-up contributions) may be contributed to a wage earner's IRA and his/her non or low-wage earning spouse's IRA, as long as the combined earned income of both spouses is greater than or equal to the contribution. Deductible (or non-deductible) IRA contributions of up to $3,000 ($3,500 with catch-up contributions) can be made for each spouse.

How does the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) affect my Traditional IRA contribution?

The new law increases the contribution limits for IRAs over several years:

Individuals who have attained age 50 by the indicated tax year, can make additional "catch-up" contributions in the indicated amounts:

What is the key tax advantages of contributing to a Traditional IRA?

Your Traditional IRA contributions may be tax-deductible. In addition, all earnings grow tax-deferred until withdrawn, at which point distributions are taxed as ordinary income to you, usually after age 59½, when you may be in a lower tax bracket. Withdrawals made before age 59½ are generally subject to a 10% penalty.

What is the benefit of having my IRA assets grow tax-deferred?

Earnings are not subject to immediate taxation; this enables them to grow much faster than if they were taxed each year. For example, if you invested $4,000 annually at the start of each year in a taxable account that earned 8% annually, your account would grow to $357,250 in 30 years (assuming a 27% average annual federal tax). If you invested $4,000 annually at the start of each year into your IRA, over the same time period, your account would be worth $489,384 assuming the same 8% annual return (although this amount would be subject to ordinary income tax when distributed).

These examples are used for illustration only. The amount you earn may be more or less than your original investment.
The Power of Tax Deferral

The chart above shows how much your IRA would grow at various annualized rates of return, assuming $4,000 contributions are made annually at the start of each year. The "Assumed Returns" shown above are before taxes are paid.
Should I have a Traditional IRA even if I cannot take a tax deduction on my contribution?

Tax deduction or not, Traditional IRAs are among but a handful of valuable tax-advantaged investment opportunities available today. Even if you do not qualify for a tax deduction, all of your earnings will grow tax-deferred until withdrawn in a Traditional non-deductible IRA. If you are limited to making non-deductible contributions, you may also wish to consider the Roth IRA, if you are eligible.
Who controls how my IRA contributions will be invested?

You decide the type of investments for your IRA. At Allegiant Financial, your Financial Advisor can provide the guidance and support you need to make the most appropriate IRA investment selections for your personal financial situation.
Which investments are eligible for my IRA?

Numerous investments are eligible funding vehicles for IRAs, including stocks, government and corporate bonds, mutual funds, options and annuities (fixed and variable). Allegiant Financial offers a wide range of investments eligible for IRAs.

How should I invest my IRA assets?

No two investors are alike. The most appropriate investment strategy for you depends on your personal financial situation. Whatever strategy you employ, be sure to spread your assets among different investments. Diversification should be the cornerstone of every portfolio. It gives you the opportunity to capitalize on various market developments while reducing your overall risk.

Is a separate Traditional IRA required to make non-deductible contributions?

No. You can make deductible and non-deductible contributions to the same Traditional IRA.

What is a Rollover IRA?

A Rollover IRA is an account set up to receive a distribution from another retirement plan. Many of the rules that apply to a Traditional IRA also apply to a Rollover IRA. For example, all earnings in a Rollover IRA grow tax-deferred for as long as they remain in the account, and you can begin taking distributions from the account at age 59½,  without penalty. Unlike the limit on annual contributions to an IRA, there's no limit on the amount of money that can be "rolled" into a Rollover IRA. It may no longer be necessary to utilize a Rollover IRA, due to the fact that EGTRRA made it possible to move assets directly between a wider range of qualified plan types.

What is the deadline for establishing an IRA?

You have until your tax filing deadline, generally April 15 of the following year, to make a contribution for the previous year's IRA. For example, to open an IRA for 2006, you can make your contribution as late as April 15, 2007.
When should I make my IRA contribution?

As early the year as possible. The sooner you put money into your IRA, the sooner it will begin to grow tax-deferred. This can be a significant benefit to you over time. For example, if you contributed $3,000 to an IRA on January 1, you could accumulate about $300 (based on an 8% rate of growth) by April 15 of the following year. However, if you waited until April 15 of the following year, you would have missed the opportunity to accumulate earnings over that 15½ month period.

Am I eligible to have a Traditional IRA?

Any person under of age of 70 ½ and receives earned income, may establish a Traditional IRA.

Can I contribute to a Traditional IRA even if I participate in an employer's retirement plan?

Yes. In fact, given the amount of money needed for retirement, contributing to a Traditional IRA, in addition to your employer's plan, generally makes good sense. Even if the contribution is non-deductible, there are few tax-advantaged opportunities available to Americans today.

Beginning in 2003, EGTRRA provides the ability for employees to make IRA contributions through their employer. More details will become available on how this option works.

Am I eligible to take a tax deduction on my Traditional IRA contribution?

If you are single and not an active participant in a qualified retirement plan, your Traditional IRA contribution is fully tax-deductible, even if you do not itemize on your tax return. Joint filers may also make fully deductible Traditional IRA contributions, if neither of whom is an active participant in a retirement plan. However, if you and/or your spouse is an active participant in a retirement plan, the contribution for the active participant(s) is subject to the deductibility limitations outlined in the following chart.

Who is eligible for a tax deduction?
(2002 Figures)

* Modified Adjusted Gross Income
Continuing through 2003, the dollar level for MAGI phaseout will increase until the phaseouts level out at $50,000-$60,000 for single filers in 2005 and $80,000-$100,000 for joint filers in 2007.

A working or non-working spouse who does not participate in a qualified retirement plan can make a $3,000 ($3,500 with catch-up contribution) tax-deductible contribution to an IRA, even if his or her spouse is an active participant in a qualified retirement plan. Joint MAGI cannot exceed $150,000 for the full tax deduction or $160,000 for a partial deduction. The spouse who is an active participant in a qualified plan is subject to the active participant deductibility rules.

How are non-deductible Traditional IRA contributions taxed upon distribution?

When distributions are received, the non-taxable portion is computed by multiplying the entire distribution by the total of non-deductible contributions divided by the total value of all Traditional IRA's.

If deductible and non-deductible contributions are made to the same account, who determines which portion is subject to income tax?

The government requires each individual must maintain documentation in order to make this decision. Keeping good records is imperative. Non-deductible contributions must be reported on IRS Form 8606 and filed with your tax return. IRS Form 8606 tracks the total basis of all non-deductible contributions.

When can I begin taking Traditional IRA distributions?

You can begin taking distributions from your Traditional IRA without penalty at age 59½. All withdrawals are taxed as ordinary income. Distributions are not eligible for special capital gains treatment or the special averaging rates for lump sum distributions.

Is there a penalty for taking premature withdrawals?

Traditional IRA distributions made prior to age 59½ are generally subject to a 10% early withdrawal penalty imposed by the Internal Revenue Service (IRS). The purpose of the penalty is to discourage investors from withdrawing money before retirement.

Can I make Traditional IRA withdrawals before age 59½ without penalty?

Yes. You can make penalty-free withdrawals in the event of death or permanent disability. There is also no penalty if you take payments based on your life expectancy (or the joint life expectancy of you and your named beneficiary), according to IRS life expectancy tables. These payments must be made for the longer of five years or until you reach age 59½, and once a schedule of payments has been determined (a "72(t) calculation"), any deviation will result in the application of the penalty to the entire amount already withdrawn.

You may also receive penalty-free distributions for qualified first-time homebuyer expenses, qualified higher education expenses and qualified medical expenses, as follows:
QUALIFIED FIRST-TIME HOMEBUYER EXPENSES:

• Distributions must be used within 120 days
• Qualified homebuyers can be a taxpayer, spouse, descendant or ancestor of either
• A qualified homebuyer cannot have had an ownership interest in a principal residence within the two-year period ending on the acquisition date of the new home
• There is a $10,000 lifetime limit for any individual

QUALIFIED HIGHER EDUCATION EXPENSES:

• Distributions may be made on behalf of the taxpayer, spouse, or any child or grandchild of either
• Distributions must be used to pay for tuition, fees, books, supplies, room and board, and graduate courses

QUALIFIED MEDICAL EXPENSES:

• Unreimbursed medical expenses must exceed 7.5% of AGI
• Distributions may be made for qualified health insurance payments
• Amounts withdrawn to satisfy an IRA levy are not subject to the 10% penalty

IRA withdrawals before retirement age should only be made after careful consideration. Remember, your IRA's primary purpose is to help you maintain your standard of living during your retirement years.

Traditional IRA?

You must begin taking minimum distributions by April 1 of the year you reach age 71½. These distributions are based on IRS life expectancy tables. If you fail to withdraw the required amount, you may be subject to a 50% penalty on the amount which should have been withdrawn, but was not.

Roth IRA Accounts

The Roth Individual Retirement Account is one of the newest retirement savings vehicles that deserves your consideration.

The Roth IRA (named for Senator William Roth) was created by the Taxpayer Relief Act of 1997. As noted below, the Roth IRA has some very different features and benefits when compared to the Traditional IRA.

The Roth IRA allows for non-deductible contributions of the lesser of your earned income or $4,000 annually (for years 2005-2007). All earnings in the Roth IRA will accumulate tax-deferred and qualified distributions and are made federal income tax and penalty-free.

Individuals who have reached age 50 may make additional "catch-up" contributions to their IRA. This alleviates the burden from missed retirement savings opportunities earlier in life.

Individuals age 50 and over, may make an additional $1000 for 2006 and beyond to their IRA in addition to the maximum annual contribution.

This chart compares the accumulation in a Roth IRA to a taxable account, assuming that $4,000 is contributed each January 1 and earns an 8% annual fixed rate of return. The taxable account is subject to an annual 27% tax rate. The chart does not represent the performance of a specific security. Actual returns cannot be predicted and will fluctuate. If funds withdrawn from the Roth IRA are not qualified distributions, they may be subject to ordinary income tax and/or a 10% early withdrawal penalty.

Are you eligible to participate in the Roth IRA?

For tax years starting between 2001 and 2007, contributions to Traditional and Roth IRA’s, made by eligible taxpayers, qualify for a tax credit. A tax credit of up to 50% of the amount contributed, applied to a maximum annual contribution amount of $2,000, may be available to single taxpayers and/or married persons filing separately with Adjusted Gross Income (AGI) of $25,000 or less, joint filers with AGI of $50,000 or less, and heads of households with an AGI of $37,000 or less.

The amount of the credit depends on the taxpayer’s AGI and the amount of qualifying contributions. The credit is in addition to any deduction or exclusion allowed for contributions.

The Traditional IRA is available to everyone who has earned income and is younger than 70 1/2. By contrast, the Roth IRA is subject to eligibility considerations. As long as your Modified Adjusted Gross Income (MAGI) falls within the limits illustrated in the chart above, you can make a non-deductible contribution to a Roth IRA of up to $4,000 (for years 2005-2007) or your earned income, whichever is less.

An attractive feature of the Roth IRA is the way distributions are made non-deductible contributions, and are always withdrawn first, federal income tax and penalty-free. This means that individuals can withdraw up to the aggregate amount of their Roth contributions (not amounts converted from a Traditional IRA or earnings) without incurring a federal tax liability.

Are there any mandatory distributions with a Roth IRA?

Penalty-free withdrawals may be made from the Roth IRA prior to age 59 1/2 for qualified education expenses for the taxpayer, spouse or any child or grandchild of either. Qualified higher education expenses include tuition, fees, books, supplies, room and board, and graduate courses. However, the distribution may still be subject to income taxes.

Unlike Traditional IRAs, there are no mandatory distributions from the Roth IRA during your lifetime. And, as long as you have sufficient earned income, you may continue to make Roth IRA contributions, even after age 70 1/2.

Federal income tax and penalty-free distributions may be made from the Roth IRA in the following circumstances:
The Roth IRA must have existed for five years after the first taxable year for which a contribution was made, and must either be made:

• After the attainment of age 59½
• Due to death or disability
• If you qualify for first-time homebuyer expenses up to a lifetime limit of $10,000

Withdrawals from Roth IRAs that do not meet the requirements for qualified distributions are includible in income. Your non-deductible contributions are always distributed first, and are always tax and penalty-free. The earnings attributable to your contributions will be subject to income taxes and the 10% early withdrawal penalty, if not made under the circumstance of the exceptions outlined above.

What are some differences between a Roth IRA and a Traditional IRA?
Choose Roth if:

• You cannot make a deductible contribution to a Traditional IRA
• You wish to make IRA contributions out of earned income after age 70½
• You want to avoid taking a mandatory minimum distribution after age 70½ 
• You want your distributions to be federal tax-free
• You want your beneficiaries to inherit the account federal income tax free

A Traditional IRA may be a better choice if:

• You qualify to make a tax-deductible contribution and wish to take advantage of the tax benefit now, rather than later
• You anticipate taking a distribution in excess of the aggregate amount of your contributions, within five years of establishing the account
• You have Modified Adjusted Gross Income (MAGI) that exceed the Roth IRA eligibility limits

It is important to note that all contributions to the Roth IRA are non-deductible. The Traditional IRA allows for tax-deductible contributions for individuals who are not active participants in an employer's qualified plan. If your joint MAGI exceeds $155,000, your spouse's active participation in a qualified plan will affect the deductibility of your Traditional IRA contribution. Active participants refer to the chart below.

How do I convert to a Roth IRA?

Many individuals may benefit from converting a Traditional IRA into a Roth IRA, however, individuals are only eligible if their single or joint MAGI is $100,000 or less (not including the rollover) and they are not married individuals, filing separately. Additionally, ordinary income taxes will be due on the taxable amount of the rollover. The 10% early withdrawal penalty does not apply in this instance.

To convert or not? Is it always the better choice? There are a number of issues to be considered when contemplating a conversion to a Roth IRA, particularly the length of time before individuals anticipate taking a distribution, and their current and future tax brackets. If an individual is currently in a low tax bracket and has a number of years before he or she will take a distribution, the conversion may be a good choice. If, however, the timeframe is short or uncertain, the individual should closely examine the tax consequences before converting.

Do you have a distribution from an employer-sponsored retirement plan that you'd like to convert to a Roth IRA?

Qualified plan distributions must go through a Traditional IRA for tax-reporting purposes before being converted to a Roth IRA.
SEP IRA (Simplified Employee Pension) and aged SIMPLE IRA (money that has met the 2-year participation requirement) distributions may be converted directly to a Roth IRA.