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IRA 101 Optimized Skills a Road Map to Success

What is an IRA? What is an IRA? An IRA is…..

INDIVIDUAL RETIREMENT ACCOUNT.

Personal savings plan that provides income tax advantages to individuals saving money for retirement purposes.

How does it

work?You invest money in an IRA, up to the amounts allowable under the tax law. These investments are termed "contributions.”

The contributions, as well as the earnings and gains from these contributions, accumulate tax-free until you withdraw the money from the account.

The withdrawals of the funds from the IRA are termed "distributions." Distributions are subject to income taxation, generally in the year in which you receive them.

IRA Contribution IRA Contribution LimitsLimits

YEAR AGE 49 & BELOW AGE 50 & ABOVE

2002-2004 $3,000 $3,500

2005 $4,000 $4,500

2006-2007 $4,000 $5,000

2008 $5,000 $6,000

2009 $5,000 $6,000

2010 Indexed to Inflation Indexed to Inflation

What are the different What are the different types of IRA’s?types of IRA’s?

Traditional IRAThe Roth IRA is an Individual Retirement Account, where contributions are made on a non-deductible basis. Earnings and the withdrawal of those earnings are income tax-free if the account is held for at least five years and you are 59½ or older.

The Traditional IRA is an Individual Retirement Account that may allow contributions to be made on an income tax-deductible basis.

Anyone under age 70½ with earned income can contribute up to $5,000 per year to a Traditional IRA.

Earnings grow income tax-deferred, while withdrawals of income tax-deductible contributions and earnings are taxed at ordinary income tax rates.

Roth IRA

Traditional vs.

ROTH The biggest difference

between the Traditional and Roth IRA is the way the U.S. Government treats the taxes.

If you earn $50,000 a year and put $2,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes……..

On the other hand, if you put the same $2,000 in a Roth IRA, you would not receive the income tax deduction

Coverdell Education Coverdell Education Savings AccountsSavings Accounts

A savings plan for higher education.

Parents and guardians are allowed to make

nondeductible contributions to an

education.

The funds must be used before the child

reaches age 30

Qualified education

expenses

tuition;

fees;

books;

supplies;

equipment; and

room and board

Coverdell Education Coverdell Education Savings Accounts Savings Accounts

cont’d..cont’d.. The tax penalty does not

apply if the Coverdell Education Savings Account distribution is due to:

death;

disability

because the beneficiary received a tax free scholarship on an educational assistance allowance;

There is a 10% tax penalty on

Any

taxable distributions from a Coverdell

Education Savings Account.

Also known as a Simplified Employee Pension

The SEP is an IRA-based plan to which employers may make tax-deductible contributions on behalf of eligible employees. The employer is allowed a tax deduction for plan contributions, which are made to each eligible employee's SEP IRA on a discretionary basis.

Employees do not pay taxes on SEP contributions, but these contributions are taxed when the employee receives a distribution from the SEP

Because the funding vehicle for a SEP plan is a Traditional IRA, SEP contributions, once deposited, become Traditional IRA assets and are subject to many of the Traditional IRA rules.

SEP IRA - Simplified Employee SEP IRA - Simplified Employee

PensionPension

Simple IRASimple IRA

Know as a Savings Incentive Match Plan for Employees

or

SIMPLE IRA

This Retirement Plan that may be established by employers including self-employed individuals, sole proprietorships and partnerships, allows eligible employees to contribute part of the PRE-TAX compensation to the plan . This means that the tax on the money is deferred until it is distributed. This contribution is called and elective-deferral or salary reduction contribution.

Like other employer plans, the SIMPLE IRA allows employers a tax deduction for contributions they make to the SIMPLE IRA plan.

The employee’s contributions to the SIMPLE IRA are not taxed, but distributions from the SIMPLE IRA are.

IRA RecapIRA RecapTraditional IRA:

Under the age of 70 ½ , with earned income who want tax –deferred retirement savings

Anticipating lower tax bracket at retirement Need the tax deduction now vs. future tax free

earnings Do not have an employer-sponsored retirement plan

available to them

Key Selling Points: Convenient, flexible way to save for retirement Possible tax deductions Federal income tax-deferred

Recap cont’d….Recap cont’d…. Roth IRA

70 ½ and over who are still receiving earned income Younger than 70 ½ who receive earned income Do not have an employer-sponsored retirement plan

available Are saving for a first home Have AGI up to $95k(indv) 150k (joint) may make full

contribution Willing to give up immediate tax deduction for future

tax-fee earnings

Key Selling Points: Tax-free earnings Access to contributions No mandatory distribution requirement

Recap cont’d….Recap cont’d…. SEP plans or Simplified Employee Pensions :Although the

employer's size is not a criterion for establishing a SEP, this type of retirement plan is used almost exclusively by small businesses. Businesses using SEPs must follow two simple rules

that limit their ability to target tax benefits toward highly compensated employees:

First they must include all qualifying employee in the plan

Second they must contribute to each employee’s account an amount proportional to his or her compensation.

Recap cont’d….Recap cont’d…. Savings Incentive Match Plans for

Employees SIMPLEs offer a trade-off between less burdensome qualification

requirements and slightly less favorable tax treatment.

A SIMPLE can be set up in the form of contributions to each employee's IRA or as a 401k Plan.

SIMPLEs must cover all qualified employees and must use one of two formulas to determine contributions. first formula, the employer matches the employee's

contributions dollar for dollar up to a total of 3 percent of compensation

Under the second formula, the employer contributes 2 percent of compensation regardless of the employee's contribution.

Questions?

Time to see how well have you been taking

notes…..

QUESTION #1:QUESTION #1:

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The END…..Created by & for Tara A. McCallum INC.

IRA Feature Comparison

IRA Features: Traditional IRA ROTHIRA

CoverdellIRA

SEP IRA

Earnings are federal income tax deferred until distribution

* *

Earning are federal income tax fee and IRS penalty free if certain conditions are met

* *

Contributions may be withdrawn federal income tax free and IRS penalty-free at any time

*

Distributions may begin at age 59 ½ * *

No required minimum distributions at age 70 ½

*

Child must be under the age of 18 for contributions and funds and must be used before the child reaches age 30

*

First Required Minimum Distribution must be taken by April 1 of the year following the year the client turns 70 ½

* *

Annual contribution limits-$5000 up to age of 50-$5000 if the client is 50+-$8-10k annul. Per couple depending on age

* * $2000k per child *

Contributions can be made for tax years prior to age 70 ½ if indv. Received earned income during those years

* * *

No age limit on contributions * *

Glossary of Terms Glossary of Terms Adjusted Gross Income:This is the calculation point

between total gross income subject to reporting to the IRS and taxable income, which is the net income after all deductions and exemptions are subtracted. The importance of your Adjusted Gross Income (AGI) is that it is increasingly the starting point for figuring all deductions that are based on or limited by a percentage of your income. Your AGI may be found on line 33 of Form 1040.

Elective-Deferral Contribution: A contribution arrangement of an employer-sponsored retirement plan under which participants can choose to set aside part of their pretax compensation as a contribution to the plan. Also known as "salary-deferral" or "salary-reduction contributions".

401(k)-type plan: an employment-based defined-contribution plan that allows employees to make tax-deferred contributions (for example, 403(b) plans and 457 plans).