Individual Retirement Accounts

Individual Retirement Accounts

Visit your local Century Bank branch for information on Traditional and Roth IRA’s (Individual Retirement Accounts).
Traditional IRA
Am I eligible to have a traditional IRA?
If you are younger than age 70 1/2 for the entire tax year and have compensation, you are eligible to establish a traditional IRA, even if you already participate in certain government plans, a tax-sheltered annuity, a Simplified Employee Pension (SEP), a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) or a qualified pension or profit-sharing plan established by an employer.

What is Compensation?
Compensation is the salary or wages you receive as an employee.  If you are self-employed, compensation is your net income for personal services performed for the business.  All taxable alimony is considered compensation.  Interest, dividends and most rental income are passive income sources and are not considered compensation.

How Much Can I Contribute to My IRA?
You may contribute any amount up to 100 percent of your compensation or $3,000 for 2002, whichever is less, to a traditional IRA (For aggregated between a traditional and Roth IRA).
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 increases the contribution limit as shown in the chart below.

 

Tax Year

Contribution Limit

2002-2004

$3,000

2005-2007

$4,000

2008

$5,000

2009 and thereafter

$5,000 + cost of living adjustment (COLA)

 

To make up for lost retirement savings, EGTRRA also added “catch up” contribution ability for individuals who have attained age 50 or older by the end of their taxable year.  The chart below shows these additional amounts.

 

Tax Year

Catch-Up Amount

2002-2005

$500

2006 and thereafter

$1,000

 

Do I Pay Taxes on the Earnings of My IRA?
All earnings on your IRA contributions (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the account.

Do I Get a Tax Deducation for My Contribution?
Deductibility of your contribution is based on whether you or your spouse are an active participant in an employer-sponsored retirement plan.  If you are an active participant, the deductible amount is dependent on your modified adjusted gross income (MAGI) and income tax-filing status.  You may be eligible for the maximum deduction, a partial deduction or no deduction.  Your tax professional can help you determine your actual deducation.

Basic Rules for Determining IRA Deductibility

  • If you are single and are not an active participant in an employer-sponsored retirement plan, or are married and neither you nor your spouse are active participants, you are eligible for a full deduction no matter how large your income.
  • If both you and your spouse are active participants or if you are single and an active participant, you may be eligible for either a full or partial deduction depending on your MAGI.
  • If you are not an active participant but your spouse is and you file a joint federal income tax return, you are eligible for a full deduction if your joint MAGI is less than $150,000.  You qualify for a partial deduction if your joint MAGI is between $150,000 and $160,000.

The chart below demonstrates the income limits for deductibility.

MAGI Phaseout Ranges
Filing Status

 

Tax Year

Single Active Part.

Low End

Single Active Part.

High End

Married, Filing Jointly Active Part.

High End

Married, Filing Jointly Active Part.

High End

Married, Filing
Separately Active Part.

Low End

Married, Filing
Separately Active Part.

High End

Married, Filing Jointly. Not Active Part.,
But Spouse Is,

Low End

Married, Filing Jointly. Not Active Part., But Spouse Is,

High End

2002

$34,000

$44,000

$54,000

$64,000

$0

$10,000

$150,000

$160,000

2003

$40,000

$50,000

$60,000

$70,000

$0

$10,000

$150,000

$160,000

2004

$45,000

$55,000

$65,000

$75,000

$0

$10,000

$150,000

$160,000

2005

$50,000

$60,000

$70,000

$80,000

$0

$10,000

$150,000

$160,000

2006

$50,000

$60,000

$75,000

$85,000

$0

$10,000

$150,000

$160,000

2007

$50,000

$60,000

$80,000

$100,000

$0

$10,000

$150,000

$160,000

 

 

What if I am not Eligible for a Deductible IRA Contribution?
You can still make nondeductible contributions to your IRA.  You may also be eligible for a Roth IRA.

How Are the Funds Taxed at Distribution?
You  must include the taxable portion of the amount withdrawn (deductible contributions and all earnings) as income on your tax return.  If you are younger than age 59 1/2, and do not meet one of the exceptions, you must also pay a 10 percent penalty fee for premature distribution.  The portion of a distribution attributable to nondeductible contributions is not taxable when withdrawn, it is subject to the 10 percent premature distribution penalty tax.

When Can I Withdraw Funds From My IRA Without Incurring any Penalties?
You can withdraw funds from your IRA without a 10 percent premature-distribution penalty any time after you reach age 59 1/2.  You can also avoid the premature-distribution penalty before age 59 1/2 if you become disabled, if the distributions are part of certain periodic payments, for medical expenses in excess of 7.5 percent of your adjusted gross income, for health insurance premiums if you have been receiving unemployment compensation for at least 12 weeks, for distributions paid directly to the IRS due to IRS leavy, for qualified higher education expenses, or for a first-time home purchase.  When you reach age 70 1/2, you must begin to take required minimum distributions or severe tax penalties will apply.

What Happens to My IRA in the Event of My Death?
Your named beneficiary(ies) will receive the entire proceeds to the IRA.  Your beneficiary(ies) will not be subject to the 10 percent premature-distribution penalty tax.  Distributions to your beneficiary(ies) will be made in accordance with the required minimum distribution rules and your IRA agreement.

What is a Spousal IRA?
The spousal IRA rules allow a married person to make an IRA contribution for his/her spouse.  A married couple can contribute up to 100 percent of their combined compensation or $6,000 for 2002, whichever is less.  The amounts can be divided in any manner between the two spouses’ IRAs if no more than $3,000 is contributed to either IRA.  These amounts will increase each year as shown earlier.  Catch-up contributions are available for eligible spousal IRA arrangements and would increase the allowable contribution amounts.

How Do I Move Funds from One IRA to Another?
There are two methods you can use to move funds from one IRA to another: rollover and transfer.  For a rollover, you have 60 calendar days following the date of receipt to roll over the distribution of another IRA.  Rollovers from IRAs may not occur more than once during a 12-month period (this rule applies to each separate IRA you own).  A transfer occurs when the funds are moved from one IRA to another without you having control or custody of the funds.  There are no time or frequency limits on the number of transfers permitted.

How Do I Move Funds from a Qualified Plan (QP), Tax-Sheltered Annuity (TSA), or IRC Section 457(b) Deferred Compensation Plan to a Traditional IRA?
An eligible QP, TSA, or 457(b) plan distribution may be rolled over or directly rolled over to an IRA.  Generally, an eligible rollover distribution is any distribution except one that is (1) part of a series of substantially equal periodic payments over your single life expectancy or joint life expectancy of you and your beneficiary or for a specified period of ten years or more, (2) a required minimum distribution for an employee age 70 1/2 or older, or (3) any hardship distribution.

A rollover occurs when funds distributed from your QP, TSA, or 457(b) plan are paid directly to you, then subsequently rolled over by you to an IRA within 60 calendar days.

A direct rollover is a QP, TSA, or 457(b) plan distribution that is made payable to an IRA by the plan administrator/employer.

QP, TSA, and 457(b) plan distributions paid to you are subject to a mandatory 20 percent federal income tax withholding at the time of distribution.

Funds moved to an IRA via a direct rollover are not subject to withholding.

As with an IRA-to-IRA rollover, a QP, TSA, or 457(b) plan recipient has 60 calendar days following the date of receipt to roll over any portion of the distribution to an IRA.  The 12-month limitation does not apply to rollovers from a QP, TSA, or 457(b) plan to an IRA.

Is There a Contribution Deadline for Funding an IRA?
IRAs for a taxable year can be opened and/or funded any time between the first day of the year and the date a tax return is due for that year, excluding extensions.  For most taxpayers, this due date is April 15 of the following year.

Are There Other Tax Advantages to Establishing an IRA?
EGTRRA added a unique tax credit for certain taxpayers who contribute to an IRA and/or employer’s salary deferral plan.  See your tax professional for more information.

How Do I Open an IRA?
See any of our IRA representatives.  We will explain the nature of these accounts in more detail and help you complete the forms necessary to establish your IRA.

This information is effective for the tax year 2002 and thereafter.  This information is intended to provide general information concerning federal tax laws governing traditional IRAs.  It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances.  For specific information, you are encouraged to consult your tax or legal professional.  IRS publication 590, Individual Retirement Arrangements, and the IRS’s website, www.irs.gov, may also provide helpful information.
Roth IRA
What is a Roth IRA?
A Roth IRA is an individual retirement account that allows only nondeductible contributions but features tax-freewithdrawals for certain distribution reasons after a five-year holding period.  The term “tax-free” means free from federal income taxes.

Am I Eligible for a Roth IRA?
There are two requirements for eligibility to contribute to a Roth IRA: you must have compensation (or your spouse must have compensation) and your modified adjusted gross income (MAGI) cannot exceed certain limits (see below).

How Much Can I Contribute Each Year?
You may contribute any amount up to the lesser of 100 percent of your compensation or the maximum contribution amount (MCA), if your MAGI is within prescribed limits.  These prescribed limits for contribution are:

Single Filers

 

MAGI of $95,000 or less

MAGI Between $95,000 and $110,000  

MAGI of $110,000 or more

Full Contribution

Partial Contribution

No Contribution

 

Married, Joint Filers

MAGI of $150,000 or less

MAGI Between $150,000 and $160,000  

MAGI of $160,000 or more

Full Contribution

Partial Contribution

No Contribution

Married, Single Filers

MAGI Less Than $10,000

MAGI of $10,000 or More

Partial Contribution

No Contribution

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 increases the MCA as shown in the following chart.

Tax Year

Maximum Contribution Amount

2002-2004

$3,000

2005-2007

$4,000

2008

$5,000

2009 and thereafter

$5,000 + cost of living adjustment (COLA)

The MCA is the aggregate amount that you can contribute to any Roth and/or Traditional IRA in a given year.  For example, if you are younger than age 50 and you contribute $500 to a traditional IRA for 2002, you can only contribute $2,500 to a Roth IRA.

To make up for lost retirement savings, EGTRRA also added a “catch-up” contribution ability for any individual who reaches age 50 or older by the end of his/her taxable year.  The chart below shows these additional amounts which will increase the MCA for Roth and Traditional IRA owners age 50 and older.

 

Tax Year

Catch-Up Amount

2002-2005

$500

2006 and thereafter

$1,000

 

Do I Pay Taxes on My Earnings?
No, provided you take the earnings as part of a qualified distribution.  That’s the best part of the Roth IRA.  Unlike a traditional IRA, you cannot take a tax deduction for any of the contributions that you make to a Roth IRA.  However, when you are ready to make a withdrawal, you pay no taxes on any of the earnings that your contributions have generated.

What is a Qualified Distribution?
In order for earnings to be tax-free, you must first meet a five-year holding period for your Roth IRA.  This period begins with the tax year for which your first contribution is made.  After that, any earnings you withdraw for a qualified distribution reason are income tax free and penalty tax free.  Qualified distributions are:

  • Distributions made on or after the date on which you attain age 50 1/2,
  • Distributions made to your beneficiary (or your estate) upon your death,
  • Distributions attributable to your being disabled, and
  • Qualified first-time home buyer distributions (up to $10,000).

Does the 10 Percent Premature-Distribution Penalty Apply if I Withdraw My Money Before Age 59 1/2?
The 10 percent premature-distribution penalty tax does not apply to earnings you withdraw when you take any of the qualified distributions listed above.  The 10 percent premature-distribution penalty tax is also waived for certain other distribution reasons.  But, income taxes on any earnings will apply.  Distributions that are subject to taxes on any earnings withdrawn, but no penalty, include:

  • Substantially equal periodic payments,
  • Eligible medical expenses in excess of 7.5 percent of your adjusted gross income (AGI),
  • Health insurance premiums for eligible unemployed individuals,
  • Qualified higher education expenses,
  • Distributions taken within the first five years of any of these reasons: age 59 1/2, death, disaibility, or first-time home purchase, and
  • Distribution paid directly to the IRS due to IRS levy.

Distributions taken for any reason other than a qualified reason, or one of the reasons listed above, are subject to both taxes and a 10 percent premature-distribution penalty on any earnings withdrawn.

A helpful feature of the Roth IRA is that, for distributions, original contribution amounts are returned first.  Contributions are not subject to taxation or the 10 percent premature-distribution penalty tax when distributed.  In other words, you can always withdraw your principal income tax free and penalty free for any reason.

When Do I Have to Start Taking Distributions from my Roth IRA?
You never have to take distributions from your Roth IRA.  That’s another advantage of the Roth IRA over the Traditional IRA.  Assets held in a Roth IRA are not subject to age 70 1/2 required minimum distributions.

Can I Move Funds from a Traditional IRA to a Roth IRA?
The law allows a single or joint income tax filer with a MAGI of $100,000, or less, to convert his/her traditional IRA into a Roth IRA.  For married taxpayers filing joint returns, the $100,000 limit for conversion eligibility applies to the couple’s joint MAGI.  A married individual who files a separate return is not eligible to convert.  Specific rules may apply in this case; please seek professional tax or legal guidance.

For a conversion to a Roth IRA, the amount converted will be subject to income taxes.  However, the funds will not be subject to a 10 percent premature-distribution penalty tax.

What is the Contribution Deadline for Funding a Roth IRA?
For a given taxable year, you can open and fund a Roth IRA any time between January 1 and the date a tax return is due for that year, excluding extensions.  For most taxpayers, this due date is April 15 of the following year.

How Do I Open an IRA?
See any of our IRA representatives.  We will explain the nature of these accounts in more detail and help you complete the forms necessary to establish your Roth IRA.

This information is effective for the tax year 2002 and thereafter.  This information is intended to provide general information concerning federal tax laws governing Roth IRAs.  It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances.  For specific information, you are encouraged to consult your tax or legal professional.  IRS publication 590, Individual Retirement Arrangements, and the IRS’s website, here
, may also provide helpful information.

Note for all IRAs:  A minimum deposit of $1,000 is required to open an IRA.  A penalty will be imposed for early withdrawal before maturity.

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