Types of Retirement Accounts
Traditional IRA
A Traditional IRA allows eligible individuals to make annual contributions of up to $4,000 or 100% of compensation, whichever is less, for tax years 2005 through 2007. Contributions may be tax deductible, depending on adjusted gross income (AGI), tax filing status, and participation in an employer-sponsored retirement plan. Any earnings may grow tax deferred until withdrawn. Individuals age 50 or over may make additional, or “catch-up,” contributions to their Roth IRA of up to $1,000 for 2006.
Who is eligible:
- Individuals who are ineligible to contribute to a Roth IRA due to adjusted gross income limits.
- Individuals with compensation who are under the age of 70½.
- Nonworking spouses who file a joint tax return.
- Distributions from 403(b) plans, may be rolled over to a Traditional IRA for municipal works.
- Distributions from 457 plans may be rolled over to a Traditional IRA for hospital workers and teachers.
Roth IRA
A Roth IRA allows eligible individuals to make annual contributions of up to $4,000 or 100% of compensation, whichever is less, for tax years 2005 through 2007 depending on filing status and adjusted gross income (AGI). The greatest advantage of a Roth IRA is that it may enable individuals’ contributions to accumulate tax free. This means that eligible Roth IRA owners won’t pay taxes on any earnings in their accounts, provided certain conditions are met.
- Contributions are made after taxes.
- Allows annual contributions to be withdrawn at any time, tax free and penalty free, and earnings can be withdrawn tax free after just five years, provided certain conditions are met.
- Individuals age 50 or over (by December 31 of the calendar year for which the contribution relates) may make additional, or “catch-up,” contributions to their Roth IRA of up to $1,000 for 2006.
- Investors can convert Traditional IRA, Rollover IRA, SEP-IRA, or SIMPLE IRA (after two-year period) assets to a Roth IRA if adjusted gross income (joint or individual) is $100,000 or less.
Rollover IRA
A Rollover IRA plan allows you to take control of the money you have in a former employer's retirement plan. This type of retirement account is usually made after one leaves his/her job.
- No contribution limit.
- Tax-free if done properly.
Eligible distributions can be rolled over to a Rollover IRA — which will enable them to:
- Maintain their retirement savings in a tax-deferred account.
- Avoid penalties and taxes for any early distributions they may receive from their employer-sponsored retirement plans
- Allow their account earnings to continue to accumulate on a tax-deferred basis
- Enjoy the convenience of having their retirement assets in one account
Education IRA
The Education IRA accumulates tax-deferred earnings to pay education expenses, which may be withdrawn tax-free. The account may be established for a child under 18.
- In 2002, the annual contribution limit was increased from $500 to $2,000. You can make a contribution for 2003 up until April 15 th 2004.
- Qualified education expenses have been broadened to include elementary and secondary school.
- Covered expenses include tuition, fees, tutoring, books, supplies, board and uniforms.
Simplified Employee Pension Plans
A SEP-IRA (Simplified Employee Pension Plan) is a tax-deferred retirement plan designed for self-employed individuals, independent contractors, or small-business owners seeking to create a retirement plan for themselves and/or to provide a valuable benefit for employees. Employer and employee contributions to the SEP plan are deductible as a business expense and receive tax-deferred growth. Contributions can be made up until the employer's tax filing deadline, including extensions.
- For 2006 an employer's deduction limit is 25% of Adjusted Gross Income (AGI).
- For 2006, the maximum contribution allowed by a participant is the lesser of $42,000 or 25% of his/her compensation.
- Distributions from 403 (b) plans and 457 plans may be rolled over to a SEP plan.
- Small business owners receive a tax credit of up to $500 for startup costs for each of the first 3 years of a SEP plan established on or after Jan 1. 2002.
SIMPLE Plans
A Savings Incentive Match Plan for Employees Plan is a tax-deferred retirement plan for small employers with 100 or fewer employees, which allows employee salary reduction contributions and employer matching contributions. An employer must either match 100% of each employee's elective compensation regardless of whether he or she makes an elective contribution. Contributions can be made up to the employer's tax-filling deadline, including extensions.
- Salary deferral limit of $10,000
- Taxpayers age 50 and older may make catch-up contributions of $2,500.
- Small business owners receive a tax credit of up to $500 for start-up costs for each of the first 3 years of a SIMPLE plan established on or after Jan 1 2002.
Profit Sharing Plan
For businesses with a number of part-time employees or high employee turnover, or those needing the freedom of variable contributions, a Profit-sharing plan may be the perfect answer.
- Discretionary contributions of up to 25% of compensation (20% of net profits for a self-employed person).
- The potential to exclude part-time and seasonal workers, depending on the eligibility requirements you select.
- Choice of vesting schedules may be available.
- Loans and hardship withdrawals may be available.
- The option of Social Security integration.
Money Purchaser Pension Plan
Annual contributions to this plan are made at a fixed rate of up to 25% of compensation and are required. For 2004, the compensation cap is $200,000. The IRC section 415 limit for annual contributions is now $40,000.
Self-Employed 401(k)s
An Individual (k) or Single (k) plan capitalizes on recent tax law changes, allowing owner-only businesses to enjoy the same benefits of larger company 401(k) plans. They have higher contribution limits than SEP-IRAs and SIMPLE-IRAs, allowing you to invest more now to potentially reach your retirement goal faster.
- High tax-deductible limits – up to $44,000 annually.
- Immediate vesting.
- “Catch-up” contribution of up to $5,000 for those ages 50 and older.
- Retirement asset consolidation.
- Access to loans.
Roth 401(k)
Similar to a basic Roth-IRA, Roth 401(k) contributions are made with after-tax dollars and are eligible to grow tax free. Unlike a Roth-IRA, participants may contribute regardless of how much they earn.
- Salary deferral contributions only.
- $15,000 contribution limit for 2006.
- “Catch-up” contribution of $5,000 for those ages 50 and older.
- Contributions may be split between Traditional 401(k) plans and Roth 401(k) plans. Employer contributions are treated as Traditional 401(k) contributions.
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