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Q. What are the different types of IRAís?
A. There are five different types of IRAís:
- TRADITIONAL IRA
You can contribute up to $2,000 per year into an IRA. The amount of this contribution
that is deductible on your income tax return depends on your
Adjusted Gross Income (AGI)
and whether you are covered under an employer sponsored qualified retirement plan.
Thus, depending on your filing status (Single, Joint, etc), and your AGI, your contributions
may range from fully deductible to totally non-deductible. So even though you are eligible
to contribute to your IRA, you may be in a position where none of these contributions are
in fact deductible.
- EDUCATION IRA
You can put away up to $500 per year into an education IRA, the money grows tax-free
and has preferential tax treatment upon distribution to the beneficiary who uses it for
authorized education expenses. These plans are not very common in that they are very
restrictive on who can make contributions to them, the amount of total contributions
allowable each year, and the limitations on what exact education expenses qualify.
Your financial planner should be able to assist you in evaluating what savings plan you
should undertake to prepare for higher education costs, as well as in reviewing many of
the tax-sheltered savings plans now sponsored by the various states, even for benefits of
- SEP IRA - Simplified Employee Pension
This is an employer established and
funded Simplified IRA, where the employer can put up to 15% of your compensation into
a special IRA account. Sole proprietors may establish these plans for their own benefit.
They are sometimes used instead of Keogh retirement plans because they have fewer
administrative and tax filing requirements.
- SIMPLE IRA
This is a rather new creation, but rapidly becoming more popular. Itís another employer
sponsored and administered retirement plan. The attractive features of this plan
includes not only the ability for the employer to establish and fund a retirement plan
for the benefit of him/herself and his/her employees, but it also permits employees to
contribute up to 100 %, but no more than $6,500 per year, into an IRA. Separate rules
relative to required employer contributions and premature distributions apply.
- ROTH IRA
Contributions are NOT deductible when the funds are contributed, but the Roth IRA
earnings accumulate tax-free and remain tax-free upon distribution. To be eligible to
contribute, your Adjusted Gross Income must be under $95,000 for singles and $150,000
for married couples, as of December 2000. You cannot withdraw your funds within the first
5 years after the establishment of the Roth without a penalty. Given that this 5-year
testing period can successfully be addressed by proper tax planning, the establishment
and at least partial funding of a Roth IRA account should be on the discussion list of
the financial advisor of every taxpayer who qualifies to open such a plan.