Individual Retirement Account

1. Individual Retirement Account (IRA) pp. 628-630…

2. Definition • It’s an ACCOUNT • It’s NOT employer-sponsored • Contributions MAY be tax deductible • Earnings grow Tax-Free • Withdrawals may be taxed at ordinary rates • Early withdrawal penalties

3. Self-Directed Account • Freedom to select your investments within your IRA • Use care in selecting

4. Major IRA Types • Deductible (Traditional) • Roth • After-Tax • Education

5. Deductible (Traditional) IRA • Contributions deductible (if no employer plan or if combined AGI< $52K) • Maximum contributions of up to $5000 per year by 2008 • May make penalty-free withdrawals at 59 ½ • Must start withdrawals by 70 ½ • Penalty-free early withdrawals allowed for 1st time home, education, & medical costs… • Withdrawals are taxed at ordinary income tax rate

6. Roth IRA • Allowed regardless of employer retirement plan or pension status • Contributions NON-deductible • Contributions may be made by couples with AGI<$150K • Earnings grow tax-free • Withdrawals are tax-FREE, if age 59 ½ and acct open for at least 5 years • NO requirement that you must begin withdrawals by age 70 1/2 • Early withdrawal penalties / exceptions are same

7. Non-Deductible (After Tax) IRA • Open to anyone…no income or employer restrictions. • Contributions not deductible. • Earnings grow tax-free • Withdrawals at age 59 ½ taxed at ordinary income tax rates • Early withdrawal penalties apply

8. Education IRA • Purpose to fund future education expenses • Set up for child under 18, by couples with AGI < $150K • Non-deductible contributions of $2000 per child. • Earnings grow tax-free. • Withdrawals are TAX-FREE (if used for qualifying education expenses). • Withdrawals must be made by age 30

9. Roth vs. Traditional • Which is better?