Answers to the most frequently asked questions about IRAs

Q. Who is eligible to contribute to an IRA?

A. IRA participants eligible to make regular contributions include anyone who has earned income (and is less than 70-1/2 years old for Traditional IRAs). Since IRAs are particularly advantageous for young people--because of potential for long-term tax-deferred and possibly tax-free growth--you might want to encourage children or grandchildren to begin making IRA contributions as soon as they become eligible. Also, learn about your new Roth IRA and Education IRA options. Consult our Contributions Expert to help determine which IRA option is best suited to your situation. (This should only be used as a guide. Please see your tax advisor for more information.)

(Contributions Expert is a simple chart with a simple formula based on your marital status, income, and whether or not you and/or your spouse are covered by an employer-sponsored plan. When you answer three questions, Contributions Expert identifies the plans for which you may be eligible.)

Q. Is there a limit to the amount I can contribute to an IRA each year?

A. Yes, there is an annual limit to the amount an individual can contribute to IRAs. The federal government limits IRA contributions to the lesser of 100% of earned income or $5,000 a year. Married couples with one working spouse may contribute up to $8,000 this year ($9,000 if one of you is age 50 or over and $10,000 if both of you are age 50 or over).

Contributions to Roth IRAs need to be included when determining total individual contributions to all IRAs. However, Education IRA contributions are not included when determining total individual contributions to all plans, and there is no dollar limit on qualifying rollovers from qualified retirement plans such as 401(k), pension and profit-sharing plans, or transfers from other IRAs.

Q. How can I tell if my IRA contribution is tax-deductible?

A. You may fully deduct any Traditional IRA contribution you make (up to the allowable contribution limits) if you are not covered by a retirement plan at work. Roth IRA and Education IRA contributions are not tax-deductible.

Q. Should I contribute to an IRA even if I can't deduct it from my taxes?

A. You may now have more tax-saving options than before. Even without the benefit of tax deductibility, a Traditional IRA's most valuable benefit remains intact: tax-deferred

Q. When can I withdraw funds from an IRA without incurring tax penalties?

A. In order to avoid tax penalties, you must wait until you attain the age of 59-1/2 to withdraw funds or be able to demonstrate your withdrawal is being used for qualified higher education expenses or a first-time home purchase. Roth IRA holders must also satisfy a minimum five- year holding period. If a person takes funds out of an IRA before age 59-1/2 for purposes other than qualified higher education expenses or the first-time purchase of a home, this is a "premature" distribution and a 10% penalty may be assessed by the Internal Revenue Service (IRS). Premature distributions are also subject to income tax. There are some additional, special circumstances such as death, permanent disability, mental incompetence and certain medical expenses that allow funds to be withdrawn without a 10% premature penalty. Also, setting up a "substantially equal periodic payment" schedule is another way to withdraw funds without the IRA penalty (see your tax advisor for more information.) After age 59-1/2, an individual can withdraw funds whenever requested and in any amount without incurring tax penalties.

Q. What are my options regarding moving funds from my employer-sponsored retirement plan into an IRA?

A. The easiest way to move employer-sponsored qualified retirement plan funds into a Traditional IRA is to do a Direct Rollover. In this situation, a retirement plan distribution is made payable to the receiving financial institution in care of the IRA holder. The dollar amount being rolled over is unlimited and no federal tax withholding applies. With an Indirect Rollover, the distribution check is made payable directly to the individual. Because the individual receives the funds, there is a mandatory 20% federal tax withholding (with the potential of additional taxes owed at tax time). After receipt, the individual has up to 60 days to roll the funds into an IRA. If the individual makes up the 20% difference and rolls over the full amount within this time frame, he or she can report this at tax time and likely receive a refund for the initial 20% withholding.