University of Michigan Credit Union

IRA ACCOUNT QUESTIONS

What is the Roth IRA?
How does the Roth IRA work?
Who is eligible to contribute to a Roth IRA?
How much is the full Roth IRA contribution?
What happens if my (our) income is too high to make a full contribution to a Roth IRA?
Can I still contribute to a Roth IRA if I participate in an employer-sponsored retirement plan?
Will my Roth IRA affect the amount that I can contribute to my employer-sponsored retirement plan?
When can I start taking tax-free distributions from my Roth IRA?
If I already have a Roth IRA, can I have a traditional IRA too?
What if I make an early withdrawal from my Roth IRA and I am not age 59 and a half or covered by any exceptions?
Do I have to take minimum distributions from my Roth IRA when I reach age 70 and a half?
What is a traditional IRA?
How does the traditional IRA work?
How much can I contribute to a traditional IRA?
Can I get any tax credits for making IRA contributions?
Can I still contribute to a traditional IRA if I participate in an employer-sponsored retirement plan?
Can I convert my existing traditional IRA to a Roth IRA?
Does the IRA conversion contribution ceiling of $100,000 MAGI include the IRA conversion amount?
If I convert a traditional IRA to a Roth IRA, do I owe any taxes?
What about penalties on conversions from traditional IRAs to Roth IRAs?
Are there different tax rules regarding withdrawals of IRA conversion contributions?
What is a "catch-up" IRA contribution, and am I eligible?
I'm leaving my job. Can I roll my 457 (b) plan into an IRA?

What is the Roth IRA?

The Roth IRA is an individual retirement account created by the Taxpayer Relief Act of 1997. Named for former Senate Finance Committee Chairman William Roth, Jr., this IRA offers more incentives to boost your retirement savings, as well as more ways to use your nest egg.

How does the Roth IRA work?

Unlike traditional IRAs, your contributions to a Roth IRA are never tax-deductible. However, the money in your Roth IRA, including earnings, can be withdrawn tax-free. Of course, you must conform to the plan provisions to get this tax-free advantage

Who is eligible to contribute to a Roth IRA?

You are eligible if you earn compensation and your income is less than limits set by Congress. A single filer who has modified adjusted gross income (MAGI) up to $95,000 can make the full Roth IRA contributions for that year. Each spouse filing a joint federal income tax return showing a MAGI up to $150,000 can make the full Roth IRA contributions for that year. Some people with higher MAGI may be able to make smaller contributions.

How much is the full Roth IRA contribution?

The amount of a full Roth IRA contribution varies. If you meet the eligibility tests described above and you are under age 50, you can contribute up to $4,000 for 2006 and 2007. If you have turned 50 by the end of a year, then your limits are $5,000 for 2006 and 2007.

What happens if my (our) income is too high to make a full contribution to a Roth IRA?

A portion of the full contribution can be made if your MAGI is between $95,000 and $110,000 for single filers, and between $150,000 and $160,000 for joint filers. When income exceeds $110,000 for single filers and $160,000 for joint filers, a regular Roth IRA contribution can not be made for that year.

Can I still contribute to a Roth IRA if I participate in an employer-sponsored retirement plan?

Yes, and you can contribute past age 70 1/2 as long as you continue to earn compensation.

Will my Roth IRA affect the amount that I can contribute to my employer-sponsored retirement plan?

No. The amount you contribute to your 401(k) or other employer-sponsored plans will not be affected by your Roth IRA. However, you must conform to the plan contribution limits for your employer-sponsored plan.

When can I start taking tax-free distributions from my Roth IRA?

You can withdraw most contributions without paying income tax at any time. Distributions are treated as first being attributable to your contributions until all of your contributions have been distributed. There are two requirements to qualify for tax-free withdrawals of the income your Roth IRA has earned. First, your Roth IRA must meet the "five-year test." In other words, it must be five years after the first year for which Roth contributions were made. Second, one of the following conditions must apply:

You are over age 59 and a half
Funds are going to your beneficiary upon your death
You have become disabled
You are using the funds for a first-time home purchase (lifetime limit is $10,000 per person)

If you have made a conversion contribution, please reference the questions below for taxation issues regarding conversions in this situation.

If I already have a Roth IRA, can I have a traditional IRA too?

Yes, you can. However, the limits on annual contributions described above apply to any combination of traditional and Roth IRA contributions that you make for the year.

What if I make an early withdrawal from my Roth IRA and I am not age 59 and a half or covered by any exceptions?

Good news. If you make early withdrawals from a Roth IRA to which you have only made regular contributions of up to $2,000 per year, the amounts are considered to come from your already-taxed contributions first, with no additional taxes or penalties due. When you begin to withdraw earnings from the account, this money will be subject to ordinary income taxes, plus an additional 10 percent early distribution tax.

Do I have to take minimum distributions from my Roth IRA when I reach age 70 and a half?

No. The Roth IRA is more flexible than a traditional IRA because you are not required to start taking minimum distributions when you reach age 70 and a half. If you don't need the cash, you can let your money continue to grow tax-free for as long as you like. However, minimum distributions must be made to your beneficiaries following your death

What is a traditional IRA?

A traditional IRA is a type of retirement plan that has been in existence since 1975. Traditional IRAs offer tax-deferred earnings, and the possibility for tax-deductible contributions. These tax advantages make the traditional IRA a powerful tool in creating a balanced, long-term savings plan.

How does the traditional IRA work?

You can contribute to a traditional IRA if you earn compensation and you will not reach age 70 and a half by the end of the year. If you file a joint tax return, you can treat your spouse's compensation as your own (except your combined contributions cannot exceed your combined compensation). All earnings in the traditional IRA are not taxed until they are withdrawn. The ability to defer taxes on the earnings, and to withdraw in a year when you may be in a lower tax bracket, can mean more after-tax dollars for your retirement

How much can I contribute to a traditional IRA?

If you meet the eligibility tests described above and you are under age 50, you can contribute up to $4,000 for 2006 through 2007. If you will be 50 by the end of the year, then your limits are $4,500 for $5,000 for 2006 and 2007.

Can I get any tax credits for making IRA contributions?

You may be able to receive a tax credit for making contributions 2006 tax years. The full credit is 50 percent of the first $2,000 of contributions. The full credit is available for joint filers who have joint MAGI up to $30,000, heads of households with MAGI up to $22,500, or other filers with MAGI up to $15,000. Smaller tax credits are available for joint filers with MAGI up to $50,000, heads of households with MAGI up to $37,500, or other filers with MAGI up to $25,000.

Can I still contribute to a traditional IRA if I participate in an employer-sponsored retirement plan?

Yes, your participation in an employer-sponsored retirement plan will not affect your ability to contribute to a traditional IRA (assuming age and compensation requirements are met). However, higher-income earners will lose their ability to deduct their traditional IRA contributions if participating in an employer-sponsored plan

Can I convert my existing traditional IRA to a Roth IRA?

Yes. You can convert your traditional IRA to a Roth IRA if your MAGI in the year of the conversion is under $100,000. This limit is the same for both single filers and married couples who file jointly. Married taxpayers who file separately are not eligible for a Roth conversion. Use care and be sure to get all the facts. This is a complicated decision

Does the IRA conversion contribution ceiling of $100,000 MAGI include the IRA conversion amount?

No, the MAGI is calculated prior to adding the amount of the IRA conversion contribution.

If I convert a traditional IRA to a Roth IRA, do I owe any taxes?

Yes. Upon conversion, you will owe ordinary income taxes on your investment earnings and on deductible contributions you have made to your traditional IRA. This amount is taxable income in the year the money leaves the traditional IRA. Basically, you owe tax on any money that has not been taxed before. But you will have the opportunity to withdraw earnings made after the conversion, free of any taxes.

What about penalties on conversions from traditional IRAs to Roth IRAs?

The 10 percent early withdrawal penalty is waived on IRA conversions.

Are there different tax rules regarding withdrawals of IRA conversion contributions?

A distribution that is attributed to an IRA conversion contribution is not subject to income tax. If the distribution is made within five years after the conversion, then the 10 percent early withdrawal tax applies unless there is an exception.

What is a "catch-up" IRA contribution, and am I eligible?

The name says it all - "catch-up" contributions are specifically designed to help those who are getting closer to retirement catch up on their retirement savings. You're eligible as long as you're at least 50 years old during the year the contribution is for, and of course, as long as you meet the eligibility requirements for traditional or Roth IRAs.

Here's how they work. For tax year 2006 and on, the catch-up contribution increases to $1,000 above and beyond the regular contribution limit. The bottom line is a lot more money for your retirement goals - in fact, almost $30,000 more if you contribute the maximum plus the catch-up contribution at the start of each year from age 50 to 70 and earn a 5% return.

I'm leaving my job. Can I roll my 457 (b) plan into an IRA?

Yes - if it is a governmental 457(b) plan. You can also roll funds from 403(b)s and qualified retirement plans (QRPs) -- including 401(k)s -- into an IRA. Or you can roll the plan assets from any of these plans into each other. Likewise, IRA distributions will be eligible for rollover to QRPs, 457(b)s or 403(b)s.*

All of this is good news if you're receiving plan distributions due to a job change or retirement. It means more investment options and more payment options for your plan assets. And if you do a direct rollover (where the check is made out to your financial institution on behalf of the IRA), your funds won't be subject to taxes or penalties.

*The receiving plan must have terms that allow for a rollover to occur; some plans do not accept rollovers.

IRA QUESTIONS