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The Features of IRAs
Among their other features, Roth IRAs offer federally tax-free withdrawals and Traditional IRAs offer tax-deductible contributions to qualified investors. To determine your maximum contribution limit, please refer to the comparison chart below.
Two Types of IRAs: Roth IRAs and Traditional IRAs
Roth IRA
Assets grow federally tax-free with a Roth IRA. This means you'll never have to pay federal income taxes on your earnings, provided certain requirements are met. (Qualified Roth IRA distributions or earnings are also exempt from state taxes in most states.) Contributions can be withdrawn at any time penalty and tax-free.
Traditional IRA
A Traditional IRA allows your assets to grow tax-deferred, meaning you won't pay any taxes on earnings until you withdraw the assets. For many investors, contributions to a Traditional IRA will also be tax-deductible.
|
IRA
Contribution
Limits |
|
Year |
AGE 49 &
BELOW |
AGE 50 &
ABOVE |
|
2009 |
$5,000 |
$6,000 |
|
2010 |
$5,000 |
$6,000 |
|
Roth IRA
Phase-Out
Range &
Limits |
|
Year |
Single |
Married
Filing
Jointly |
|
2009 |
$105,000
-
$120,000 |
$166,000
-
$176,000 |
|
2010 |
$105,000-$120,000
*(Rollover
limit
removal) |
$167,000-$177,000
*(Rollover
limit
removal) |
|
You can
contribute
to a
Roth IRA
if your
income
falls
below
the Roth
limits.
You're
allowed
a
prorated
contribution
if your
income
falls
within
the
"phase-out"
range.
If your
income
exceeds
the
income
range
you
won't
qualify
for a
Roth IRA
contribution.
However
in 2010
you can
still do
a ROTH
conversion,
but the
limits
still
apply
for
contributions. |
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Compare the Key Features of Traditional and Roth IRAs
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Eligibility Requirements1
|
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Traditional IRA
|
|
|
|
You must be under age 70½ with earned compensation
|
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Roth IRA
|
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You may contribute at any age as long as you have earned compensation subject to income limits as per the above chart.
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Key Tax Advantage
|
|
Traditional IRA
|
|
|
|
Tax-deferred growth
|
|
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Roth IRA
|
|
|
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Federally tax-free growth
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|
|
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Tax Deductible Contributions
|
|
Traditional IRA
|
|
|
|
Yes, subject to retirement plan participation status and Adjusted Gross Income (AGI) limits
|
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Please refer to the above charts for eligibility and contribution limits.
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Tax Treatment of Withdrawals
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Traditional IRA
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Any earnings and deductible contributions subject to tax upon withdrawal.
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Roth IRA
|
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Contributions can be withdrawn at any time without paying taxes or penalties. Earnings can be withdrawn federally tax free and penalty free if the five-year aging requirement and certain other conditions are met.
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10% Early Withdrawal Penalty
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Traditional IRA
|
|
|
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Yes, if you are under age 59½ and the withdrawal is not for the following reasons:
|
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•
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Death of the account owner
|
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•
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Part of a series of substantially equal periodic payments
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•
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Health insurance premium payments for unemployed individuals
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•
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Payments of medical expenses in excess of 7.5% of an individual's adjusted gross income
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•
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Qualified First Time Homebuyer
|
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•
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Higher Education Expenses
|
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•
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IRS Levy
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Roth IRA
|
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Contributions can be withdrawn at any time without penalty. For earnings, penalty applies if you are under 59 ½ and the withdrawal does not qualify as:
|
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|
|
|
•
|
Qualified higher education expenses;
|
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•
|
Qualified first home purchase (lifetime limit of $10,000);
|
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•
|
Certain major medical expenses;
|
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•
|
Certain long-term unemployment expenses;
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•
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Disability; or
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•
|
Substantially equal periodic payments.
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Mandatory Distributions2
|
|
Traditional IRA
|
|
|
|
Minimum required distributions must start at age 70 ½
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1 You must be 18 years old to open an IRA at First Trust and Savings Bank.
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2 Certain distribution requirements will apply after the death of Traditional or Roth IRA owner.
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IRAs for the
Single
Income
Household
|
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|
Eligibility Requirements
To make
a
spousal
IRA
contribution,
you must
meet the
following
requirements:
-
You
must
be
married.
-
You
must
file
a
joint
income-tax
return.
-
You must
have
compensation
or
earned
income
of
at
least
the
amount
you
contribute
to
your
IRAs.
|
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A spousal IRA is a way for working spouses who are not covered by an employer-sponsored plan or non-working spouses to have a Roth or Traditional IRA of their own with little or no earned income of their own.
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To be
eligible
to
contribute
to a
Roth
IRA, see
above
chart.
|
|
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For deductible contributions to a Traditional IRA, see the table below.
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Income Limits for Deductible Traditional IRA Contributions
(Married, filing jointly)
|
Please
see your
tax
advisor
|
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Choosing Which IRA is Right for You
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A few key questions can help you decide if a Traditional IRA or a Roth IRA is right for you:
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1.
|
Does your Adjusted Gross Income and your tax filing status make you eligible for a Roth IRA?
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|
•
|
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If YES, skip to Question 2.
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|
•
|
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If NO, consider contributing to a Traditional IRA where you'll enjoy tax-deferred earnings. (Skip the remaining questions.)
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2.
|
Are you eligible to deduct contributions to a Traditional IRA?
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•
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If YES, skip to Question 3.
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•
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If NO, you may want to contribute to a Roth IRA and enjoy federally tax-free earnings. (Skip the remaining question.)
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3.
|
Do you expect your tax rate to be the same or higher when you retire?
|
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|
•
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If YES, consider contributing to a Roth IRA and enjoy federally tax-free earnings.
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•
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If NO, consider contributing to a Traditional IRA.
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The Roth IRA is a Good Choice for Many
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You should now have a good idea as to which type of IRA may best suit your situation. For many individuals, contributing to a First Trust and Savings Bank Roth IRA may result in more retirement income than a comparable investment in a Traditional IRA (see chart below). If you are eligible, consider making your annual contribution to a Roth IRA. You may also want to use the IRA Evaluator to examine your options.
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On the other hand, even if you aren't eligible for a Roth IRA, anyone under age 70½ who has compensation can take advantage of the benefits of a Traditional IRA, including tax-deferred growth and the potential for tax-deductible contributions. With either type of IRA, you may still come out ahead of a comparable taxable investment because earnings aren't eroded by taxes year after year.
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Hypothetical example for illustrative purposes only and doesn't represent the performance of any security. Example compares investing in a federally tax-free account to taxable account. Assumes annual $3,000 contributions made on January 1, each year and continuing for 10, 20 and 30 years at an 8% annual rate of return. The rate of return on the taxable account is comprised of: 2% from long-term capital gain distributions paid and taxed annually, 2% from qualified dividends paid and taxed annually, 3% non-qualified dividends and short-term gains paid and taxed annually, and 1% from long-term capital appreciation taxed at the time of sale. Assumes 25% federal income tax rate, 15% tax rate on qualified dividends and long-term capital gains, and an effective 5% State tax rate.
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