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IRAs - Individual Retirement Accounts

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IRAs – Individual Retirement Accounts

Learn...

  1. What IRAs are
  2. About Traditional IRAs
  3. About Roth IRAs
  4. How to choose between Traditional and Roth
  5. About Coverdell Education Savings Accounts
  6. How to shop for IRAs
  7. Types of IRAs available at DCU
  8. Uninsured IRAs
  9. Options for Employers

IRAs – Individual Retirement Accounts

Too many Americans postpone or neglect saving for retirement believing Social Security benefits will be sufficient as a primary source of income. In most cases, this is not true. IRAs offer you tax-advantaged ways to make building your retirement nest egg easy. IRA funds deposited at DCU are federally-insured to $250,000 per member by NCUA and are backed by the full faith and credit of the U.S. government.

This part of StreetWise explains what IRAs are, how they work, and how they compare to other types of retirement plans.

For more detailed information go to Retirement Central Service Center

Individual IRA Plans

401(k), IRA, or Both?

To adequately prepare for retirement, many financial experts recommend you fully fund your 401(k), then deposit the maximum possible in an IRA. A 401(k) plan is a retirement vehicle sponsored by employers. Employees make pre-tax contributions into the plan. The employer matches a portion of the employee's contribution – usually 50% to 100% – up to a percentage of the employee's salary. The match often represents a significant portion of the investment's growth. Tax laws limit the amount of contributions employees can make.

Distributions are taxed upon withdrawal. Generally, the employer contributions are subject to vesting. This means the employee must be in the plan for a pre-set period of time before the contributions totally belong to the employee – even if they change jobs.

When someone leaves an employer, they often get a distribution from their 401(k) and possibly a pension plan. The proceeds of these distributions can be rolled directly into a Traditional IRA (see below) without any taxes or penalties.

Talk to your employer to see if a 401(k) plan is available to you and how to contribute to it. If your employer does not have a plan, opening an IRA is even more essential to your comfortable retirement.

Traditional IRAs

Contributions to traditional IRAs (under certain circumstances) and the earnings on them aren't taxed until withdrawal. At that time, withdrawals are taxed at your income tax rate. Ten percent penalty taxes may apply if you withdraw before age 59½.

You can contribute up to $5,000 a year or 100% of your earned income, whichever is less. If you are married, you can contribute up to $10,000 or 100% of your combined income, whichever is less, between each spouse's IRAs. Workers age 50 and older can play "catch-up" with their retirement savings by contributing up to $1,000 a year over the maximum contribution limits. You can make contributions up to April 15 for the prior tax year.

You can make tax penalty-free withdrawals for several reasons. You can pay first-time home-buying expenses ($10,000 lifetime limit) for you, your spouse, children, grandchildren, or parents. You can also pay qualified higher education expenses for you, your spouse, children, or grandchildren not covered by other education assistance.

Penalty-free withdrawals are also allowed for death, disability, medical expenses that exceed 7.5% of your adjusted gross income, and to purchase health insurance if you have received unemployment compensation for twelve weeks or more.

Minimum distributions are required beginning at age 70½. If you receive a distribution from a pension, 401(k), or other company retirement plan, you can roll the entire amount into an IRA and defer the taxes until withdrawal.

If you are not covered by an employer-sponsored retirement plan, you can deduct your entire contribution. If you are, it's still deductible if you're single with adjusted gross income (AGI) of $56,000 or less or married with AGI of $89,000 or less. Many non-working spouses can now deduct $5,000 in contributions even when their spouse is covered by a retirement plan.

Please consult a tax advisor to determine how federal, state, and local tax laws affect IRA deductibility for you and whether a Traditional or Roth IRA is best for your situation.

At DCU, federally-insured Traditional IRAs are available as IRA Certificates, Money Market IRAs, and Savings IRAs .

The Roth IRA

The Roth IRA offers tax-free growth when you hold it for at least five years and take distributions after you reach 59½. Unlike traditional IRAs, you can keep your account intact beyond age 70½ and can continue to make contributions. Being covered by a retirement plan doesn't affect your ability to contribute.

You can make tax penalty-free withdrawals for several reasons. You can pay first-time home-buying expenses ($10,000 lifetime limit) for you, your spouse, children, grandchildren, or parents. Penalty-free withdrawals are also allowed for death, disability, medical expenses that exceed 7.5% of your adjusted gross income, and to purchase health insurance if you have received unemployment compensation for twelve weeks or more.

You can contribute up to $5,000 a year or 100% of your earned income, whichever is less. If you are married, you can contribute up to $10,000 or 100% of your combined income, whichever is less, between each spouse's IRAs. Workers age 50 and older can play "catch-up" with their retirement savings by contributing up to $1,000 a year over the maximum contribution limits.

If you're married with adjusted gross income (AGI) below $167,000, or single with AGI below $105,000, you can make annual contributions. As of January 1, 2010, there are no income restrictions pertaining to eligibility to convert existing IRAs, deductible and non-deductible, into a Roth IRA without penalty. However, if you do, you'll owe income tax on all previously untaxed contributions and earnings.

Please consult a tax advisor to determine how federal, state, and local tax laws affect IRA deductibility for you and whether a Traditional or Roth IRA is best for your situation.

At DCU, federally-insured Roth IRAs are available as IRA Certificates, Money Market IRAs , and Savings IRAs.

Which One Is Right For You –Traditional or Roth?

Deciding which type is best and whether to transfer your current accounts to a Roth IRA is a complicated decision. You must consider your current and future tax brackets, other assets available, your age, your planned retirement age, and whether you built your current IRAs with deductible or non-deductible contributions. You also need to consider any other retirement investments you have. You can have both types of IRAs, but combined contributions can't exceed $5,000 a year. Your tax advisor can help you weigh these and other factors to make the best decision.

In general, a Traditional IRA may be better if you don't participate in an employee-sponsored retirement plan, expect to be in a lower tax bracket at retirement, and need the tax deduction. A Roth IRA may be better if you expect to be in the same or a higher tax bracket at retirement and you're starting at age 18 to 44. Because there is no mandatory distribution age, a Roth may also be better if you won't need your IRA for living expenses and want to leave sizable assets to your heirs.

When converting a Traditional IRA to a Roth, a good rule of thumb is to consider it if you can afford to pay the taxes from other savings or current earnings, or if you won't need the IRA funds during retirement and want to pass funds to your heirs. You generally should not convert if you are within five years of retirement or will need to dip into the IRA to pay the taxes.

Coverdell Education Savings Account

The Coverdell Education Savings Account, once known as an Educational IRA, is not an IRA at all, but a new way to save for qualified higher education expenses such as tuition, fees, books, supplies, and equipment (including the purchase of a computer, educational software and internet access) required for college, vocational, public and private elementary and high schools.

Education Savings Accounts are available only to children under 18. Each child can receive up to $2,000 per year in after-tax contributions from relatives and friends whose adjusted gross income (AGI) is $220,000 or less if married, or $110,000 if single. Earnings grow tax-free.

Contributions can be made for beneficiaries with special needs (determined by The Treasury) over age 18. CESA balances for those with special needs are not required to be distributed by age 30.

Distributions taken after five years are tax free and must be used for qualified higher education expenses. Tax penalties apply for early withdrawals and use for non-qualified expenses.

Please consult a tax advisor to determine how federal, state, and local tax laws affect Education Savings Accounts. At DCU, federally-insured Coverdell Education Savings Accounts are available as IRA Certificates, IRA Money Market Accounts, and Savings IRA.

Shopping for IRAs

When you are ready to open an IRA, there are certain things you want to look for to ensure you get the best possible deal:

  • Are there any IRA fees? – Most institutions, particularly those investment firms, charge annual maintenance fees. DCU does not.

  • How do the rates compare? – Are IRA dividend rates higher than those for regular accounts? In most cases at DCU, they are higher.

  • Do you get many options? – DCU offers you a wide variety of products and terms to meet your unique needs.

Insured IRA Investment Account Types at DCU

There are three types of accounts. Follow the links for more information on each one:

  • IRA Certificates – Offers the highest dividend rates in exchange for locking in your term from three months to five years.

  • Money Market IRAs – Offers tiered dividend rates. The higher your balance, the greater the rate.

  • Savings IRAs – Has the lowest minimum balance to earn dividends. A good account to get your IRA started.

All three products may be used for Traditional, Roth, Education, and for Small Business Plans.

Uninsured IRAs – Stocks, Bonds, and Mutual Funds

Uninsured IRAs offer the potential for greater return than insured IRAs. But with the greater return comes investment risk – the potential loss of principal.

Most financial advisors suggest a balanced mix of riskier investments and safer investments. The balance would change as you get closer to retirement, shifting more funds toward completely safe insured investments. People close to retirement, when they will need to begin drawing on funds, can ill-afford a market downturn that erases a significant portion of their retirement nest egg.

Small Business Retirement Plans

Simplified Employee Pension (SEP)

A SEP allows employers to set up a type of individual retirement account, known as a SEP-IRA, for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to the lesser of 25 percent of an employee's annual salary or $50,000. (Note: this amount is indexed for inflation and will vary). SEPs can be started by most employers, including those who are self-employed.

Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary. A sole proprietor, partnership, or corporation can establish a SEP for the benefit of all employees.

DCU offers SEP-IRAs as a vehicle for funding the pension plan. For more information on retirement solutions for small businesses, see the U.S. Department of Labor.

Savings Incentive Match Plan for Employees (SIMPLE)

This savings option for employers of 100 or fewer employees involves a type of IRA and is the result of new legislation, the Small Business Job Protection Act of 1996.

A SIMPLE plan allows employees to contribute a percentage of their salary each pay check and to have their employer match their contribution. Under SIMPLE plans, employees can set aside up to $11,500 each year by payroll deduction. Workers age 50 and older can play "catch-up" with their retirement savings by contributing up to $2,500 a year over the maximum contribution limits.

Employers can either match employee contributions dollar for dollar – up to three percent of an employee's wage – or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.

Employees are 100% vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

DCU offers SIMPLE IRAs as a vehicle for funding this plan. For more information on retirement solutions for small businesses, see the U.S. Department of Labor.

 

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