What is an IRA?
An Individual Retirement Account (IRA) is an investment tool created by the U.S. Government to supplement retirement income. IRAs are generally available to anyone who receives taxable earned income throughout the year. IRS Publication 590 provides information on determining what types of earned income are considered taxable. Please ask your tax advisor to help you determine the type of IRA that will best suit your needs.
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How do I open an IRA?
You may open an IRA online by using our IRA Center or by visiting one of our branches. You may also schedule a complimentary, no-obligation consultation with one of our KeyPoint Credit Union Investment Representatives.
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How much can I contribute to an IRA?
There is a maximum amount you may contribute annually to your IRA and still receive tax advantages. The IRS determines that annual maximum. A special catch-up contribution of an extra $1,000 is allowed for IRA owners who are age 50 or older.
| Year |
Maximum Contribution Limit |
| 2011 |
$5,000.00 |
| 2012 |
$5,000.00 |
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What is a Traditional (Individual Contributory) IRA?
A Traditional IRA is a type of individual retirement account. It was created in the Tax Reform Act of 1986 to provide tax payers better incentives for retirement savings.
- Income your account may earn is not taxable while it is in the account.
- If you are under age 70½ and have earned income, or a spouse with qualifying earned income, you may each contribute up to $5,000 a year which may be tax-deferred. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), certain benefits were introduced including: the increase to the Annual contribution limits and the creation of catch-up contributions. Consult your tax advisor to determine if contributions are tax deductible
- Individuals who attain the age of 50 before the close of the taxable year may contribute an additional $1,000 to their IRAs.
- The deadline for making a contribution is usually April 15 of the year following the desired contribution year (excluding extensions).
- Taxable distributions may be taken without penalty starting at age 59½ and must be started by April 1 once you have reached 70½.
- Transfers may be made to this account from Traditional, Rollover, SEP or SIMPLE IRAs, or a qualified retirement plan (401k, 403b, etc.). SIMPLE IRA transfers must meet the two-year rule.
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What is a Roth IRA?
A Roth IRA is a type of individual retirement account. The principal difference between the Roth and a Traditional IRA is: contributions to a Traditional IRA are tax- deductible (except in certain cases) and withdrawals are taxed, contributions to a Roth IRA are taxed, but qualified withdrawals are not taxed.
- Any earnings of your Roth IRA are tax-free while they accumulate.
- If your Roth IRA has been established for five years, you may take a qualified distribution for one of the following reasons:
- you are 59½,
- you are disabled and have provided proof of this, or
- you are using the funds for the first-time purchase of a home, up to $10,000.
- Regardless of your age, you may contribute up to $5,000 a year, depending on your earned income or that of your spouse. Consult your tax advisor to determine your maximum contribution.
- Contributions are not tax deductible; however, your earnings are tax-deferred.
- Transfers may be made to this account from another Roth IRA, or funds may be "converted" from a Traditional IRA.
- The deadline for making a contribution is usually April 15 of the year following the desired contribution year (excluding extensions).
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Can I take a distribution from my Roth IRA?
Yes. To meet certain financial needs, you may take a distribution from your Roth IRA assets by completing an IRA Distribution Request form. Your annual contributions may be withdrawn free of taxes or penalties by the due date for the tax year in which the funds were contributed. To take a distribution exempt from taxes and penalties, two requirements must be met
- Your Roth IRA must be established for 5 years, and
- Your distributions are for one of the following reasons:
- You have reached the age of 59½.
- You are disabled and have provided the required support documentation.
- You are a first-time homebuyer, or are buying a home after not owning one for two or more years. (You may withdraw up to $10,000 to put toward the purchase of this home. This withdrawal may be subject to taxes, and the home must be your principal residence.)
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Can I take an early distribution from my Traditional IRA?
If you are under the age of 59½, you may take an early distribution from your Traditional IRA. Early distributions are subject to taxes and in some cases, an early distribution penalty. Consult your tax adviser for more information on early withdrawal penalties. Funds can be removed from your Traditional IRA by completing an IRA Distribution Request form.
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Can I take a normal distribution from my Traditional IRA?
If you have reached the age of 59½, you may take a normal distribution from your Traditional IRA. A normal distribution is a penalty-free, taxable withdrawal. Funds may be removed from the Traditional IRA by completing an IRA Distribution Request form.
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If I can't withdraw funds without a penalty from my 401(k) plan to purchase my first home, can I roll it over into an IRA and then withdraw that money to use as my down payment?
Yes, if you are receiving a distribution from a 401(k) that is eligible to roll over into an IRA and you meet all of the qualifications for an IRA distribution for a first-time homebuyer. Your plan administrator is required to notify you before making a distribution from your 401(k) plan whether that distribution is eligible to be rolled over into an IRA. To see if you qualify for a distribution to be used as a first-time homebuyer, refer to IRS Publication 590, Individual Retirement Arrangements (IRAs).
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Can I change the beneficiary on my IRA?
Yes. You may change the beneficiary (ies) on your IRA by completing an IRA Beneficiary Designation/Change form. This form requires a Signature Guarantee and a spousal signature if you are married and your spouse will not be the primary beneficiary.
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What is an Education IRA?
A Coverdell Education Savings Account (ESA), formerly known as an Education IRA, is a plan that helps you save for education expenses. Funds in an ESA can be used to pay for elementary and secondary education expenses, college or university expenses, private school tuition, etc. The educational institution must be accredited (which in this case means the school can participate in various financial aid programs), but it does not have to be in the United States. An ESA may be established for any person who is under 18 years of age. Contributions to this account are limited to $2,000 per beneficiary. Once the beneficiary reaches age 18 no further deposits may be contributed to the ESA. Annual contributions must be made by April 15th of the following year. The major benefit of this savings vehicle is that the funds grow free of all taxes. Distributions that are taken for the purpose of paying qualified educational expenses are not subject to tax. Distributions that are used for anything other than qualified educational expenses are treated as taxable income and also are subject to a 10% penalty, unless an exception applies.
The rules for ESAs changed in mid-2001 in the following ways:
The contribution limit is now $2,000 per beneficiary per year.
Funds can be used to pay for elementary and secondary schools, including private schools, as well as colleges and universities.
There is an income limit on those who can fund an ESA. Married filers must make less than $220,000 to fund an ESA.
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What is a Simplified Employee Pension (SEP) IRA?
. A SEP plan is a retirement plan established by a business where contributions are deposited into a participant’s Traditional IRAs and are tax-deductible by the employer. These plans were created for self-employed individuals and smaller companies. Any employer including a sole proprietor with no employees can establish a SEP plan for the benefit of all eligible employees. For more information regarding eligibility, reference IRS Publication 590 [PDF - 448.6K] or IRS Publication 560 [PDF - 218.9K].
- SEP contributions are limited to the lessor of 25% of your annual income or $50,000. Each year the IRS sets a limit on the total compensation amount that your employer can consider.
- Transfers may be made to this account from Traditional, Rollover, SEP or SIMPLE IRAs and qualified retirement plans (401k, 403b, etc.). SIMPLE IRAs must meet the two-year rule.
- The deadline for making a contribution is usually April 15 of the year following the desired contribution year (excluding extensions).
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How long do I have to roll over a distribution from a retirement plan to an IRA account?
You must complete the rollover by the 60th day following the day on which you receive the distribution. (This 60-day period is extended for the period during which the distribution is in a frozen deposit in a financial institution.) The IRS may waive the 60-day requirement in certain situations, such as in the event of a casualty, disaster, or other event beyond your reasonable control. To obtain a waiver, a request for a ruling must be made and a user fee of $90.00 will apply, See Revenue Procedure 2003-16 (within IRS Bulletin 2003-4). The issuer making the distribution must give a written explanation of rollover to you. For information on distributions that qualify for rollover treatment, refer to Tax Topic 413, Rollovers from Retirement Plans. For information on the Direct Rollover Option, refer to Publication 590 Individual Retirement Arrangement.
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Can a person make a contribution to a SEP-IRA and a Roth IRA, too?
Yes, you can make a contribution to a SEP-IRA and a Roth IRA. See Publication 590, Individual Retirement Arrangements, for the requirements to contribute to a SEP and a Roth IRA. However, your SEP IRA contribution and Roth IRA contribution cannot be made to the same IRA.
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Can an individual who is contributing to a SEP-IRA also contribute to a traditional IRA?
Yes, if they meet certain requirements. A SEP-IRA is considered a retirement plan, so the Adjusted Gross Income (AGI) limitations have to be considered. If your AGI, which is computed after the SEP contribution, is more than those limits, then the IRA contribution that you make would not be deductible. The information on the AGI limits is in Publication 590, Individual Retirement Arrangements (IRAs), in the section How Much Can I Deduct? Your SEP IRA Contribution and Traditional IRA Contribution may both be made to your SEP IRA.
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I want to establish a traditional IRA for my spouse. What is the most I can contribute to it during the tax year?
If both you and your spouse work and both have taxable compensation, each of you can contribute up to $5,000 (or the amount of each IRA owner's compensation, if less) to a separate traditional IRA. Even if one spouse has little or no compensation, up to $5,000 can be contributed to each IRA if combined compensation is at least equal to the amount contributed to both IRAs and you file a joint return. You can contribute $5,000 to a separate IRA for your nonworking spouse if you file a joint return. Your total contribution to both your IRA and the spousal IRA for this year is limited to the smaller of $10,000, or your taxable compensation reduced by any contributions you make to a traditional IRA or Roth IRA. You cannot contribute more than $5,000 to either IRA for the year. If you are 50 or older, you can make a catch-up contribution of $1,000 to your IRA
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Where can I get more information on IRAs?
Please visit our IRA Center, call our 24/7 Telephone Center at 888-255-3637 or visit one of our Branch locations for more information on KeyPoint IRAs.
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