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How they work, who can use them (tax year 2006)
| Traditional Deductible IRA |
How It
Works |
• Contribute up to $4,000 a year and defer taxes until withdrawal ($5,000 if age 50+) |
• Contributions are tax deductible
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Who Can
Use It? |
• Those with a MAGI below $85,000, if married and filing jointly |
| • Singles up to a $60,000 MAGI and participating in an employer's retirement plan |
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Withdrawal
Advantages |
• Principal and earnings are taxed at time of distribution |
| • Beneficial for those who anticipate a lower tax bracket at retirement |
| • Good for those who need to withdraw for college expenses or first-time home purchase |
| Roth IRA |
How It
Works |
• Contribute up to $4,000 a year ($5,000 if age 50+) |
| • Contributions are non-deductible |
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Who Can
Use It? |
• Available to married couples with a MAGI up to $160,000 |
| • Singles, up to $110,000 MAGI |
| • Filers with a MAGI up to $100,000 are eligible to convert existing IRAs into Roth IRAs, if you are not a married individual filing separate returns |
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Withdrawal
Advantages |
• Principal and earnings are tax free at retirement |
| • Beneficial to those who anticipate a higher tax bracket at retirement |
| • Inheritance is tax free |
| • Good for those who need to withdraw for college expenses or first-time home purchase |
| Coverdell Education Savings Account (formerly Education IRA) |
How It
Works |
• This account is not really for retirement but for post-secondary education expenses |
| • Contributions are not tax deductible and are limited to $2000 a year per beneficiary from all contributors |
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Who Can
Use It? |
• Contributions can be made by anyone (parent, other relative or friend) |
| • MAGI up to $220,000 for married filing jointly |
| • MAGI up to $110,000 for singles |
| • Beneficiary must be under age 18; in some cases, the beneficiary can be 18 years or older if he/she is a special needs beneficiary |
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Withdrawal
Advantages |
• Withdrawals that are used for qualified higher-education expenses are tax free |
| • All funds must be withdrawn before beneficiary reaches age 30 or they are subject to penalty taxation |
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