• What is an IRA?
An IRA is a savings account which allows individuals to save moneyfor retirement in a tax-advantaged manner.
Individual - one human owner per IRA.
Retirement - helps owner save for retirement.
Account - an IRA is an account, not an investment.
IRA savings accounts can be opened Downtown at the Main Branch and also the Hermantown Branch.
• What qualifies as earned compensation for IRAs?
- Taxable Alimony
- Professional Fees
- Jury Pay
- Combat Pay
- Director's Fees
• What does not qualify as earned compensation for IRAs?
- Rental Income
- Unemployment Compensation
- Disability Pay
- Child Support
- AFDC & TANF
- Social Security
- Early Retirement Pay
• Who is eligible to make traditional IRA contributions?
Anyone who meets both of the requirements is eligible to make contributions to a traditional IRA:
1. Earned Compensation and
2. Age - The owner must not reach age 70 1/2 during the year for which the contribution is made.
Once a traditional IRS owner reaches age 70 1/2, they are required to begin removing funds from the IRA. This is called a required minimum distribution (RMD).
• How do I take an IRA distribution?
An IRA owner may take a distribution, also called a withdrawal, at any time. This can be done in the credit union office or through the mail.
1. The IRA owner requests a distribution form from the credit union.
2. The IRA owner completes the distribution (withdrawal) instruction form and returns it to the credit union.
3. The credit union processes the withdrawal according to the instructions on the form.
4. The IRA owner receives the funds as a check, cash disbursement, or transfer to another of their CU accounts.
5. Please note that there may be tax penalties for early withdrawals.
• Are there any exceptions to the 10% tax on early IRA distributions?
IRA owners taking distributions prior to age 59 1/2 can avoid paying the 10% early distribution tax if the withdrawal was made for one of the following reasons:
- Owner is deceased. Funds are paid to the beneficiary.
- Owner is disabled.
- Funds distributed to federal government in response to a federal tax levy.
- Owner is receiving substantially equal payments over their life expectancy (pre-59 1/2 periodic payments).
- Owner direct-transferred traditional IRA funds to a Roth IRA (Roth IRA conversion).
- Owner rolled over traditional IRA funds to a Roth.
- Owner has qualified higher-education expenses.
- Owner has qualified 1st-time home purchase expenses.
- Owner has qualified unreimbursed medical expenses greater than 7.5% of adjusted gross income.
- Owner is paying qualified health insurance premiums while unemployed for 12 weeks or longer.
- Owner has qualified military reservist distribution.
• What are the possible taxes I could receive with an IRA distribution?
IRA distributions are subject to two possible taxes:
Income tax (Federal and State):
- Federal withholding is used to prepay a portion of the income taxes potentially due on the IRA distribution.
- Some states have income tax withholding requirements on IRA distributions.
Early distribution tax (10% penalty)
• What states are community/marital property states, relating to IRAs?
Community/ marital property states are:
- New Mexico
• Can I access the money in a Roth IRA before I retire?
Yes, your contributions to a Roth IRA may be withdrawn tax- and penalty-free at any time, for any reason. After the IRA has been established for five years, earnings on contributions may be withdrawn tax and penalty-free, provided the owner meets any of the following specifications:
- has reached age 59½
- has become permanently and totally disabled
- is deceased
- is withdrawing the funds for a first-time home purchase
First-time home purchase withdrawals are limited to a maximum withdrawal of $10,000. The $10,000 for your first home is a qualified distribution as long as you've had your Roth account for five years. This means you can take out your retirement money without penalty, and Roth earnings are tax-free.
If, however, your Roth IRA is a newer account, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10 percent penalty but might owe tax on earnings that are withdrawn.
• When am I required to begin taking distributions from my Roth IRA?
You're not required to take distributions from a Roth IRA. You can allow your money to grow in a Roth IRA free of current taxes for as long as you choose.
Roth IRAs are not subject to Required Minimum Distributions during the owner's lifetime, but are subject to Required Minimum Distributions after the death of the owner.
• Can I convert my Traditional IRA to a Roth IRA?
You can convert a Traditional IRA to a Roth IRA as long as your Adjusted Gross Income (AGI) doesn't exceed $100,000 (single or joint filers) in the year of the conversion.
You should also be aware that the IRS will impose taxes on any deductible contribution or earnings on the traditional IRA amounts being converted to a Roth IRA.
• What's the maximum contribution to a Roth IRA?
The maximum allowable contribution to a Roth IRA depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs. Please see the IRS web site for more information.
• What is the difference between a Conversion Roth IRA and a Regular Roth IRA?
A Conversion Roth IRA is defined as a Roth IRA that receives money from Traditional IRAs through a conversion, rollover,or direct transfer. If an account is designated as a Conversion Roth IRA, then that account can only accept IRA conversion contributions made in a single year. A separate Conversion Roth IRA must be established each year in which an individual desires to convert assets into a Roth IRA.
Contributions are permitted until April 15th for the prior tax year.
• Can I contribute stocks or bonds to the Coverdell Education Savings Account (formerly known as the Education IRA)?
No, contributions to a Coverdell Education Savings Account must be made in cash, not securities.
• Can I roll over a 401(k) distribution to a Roth IRA?
Not directly, but you can roll over a 401(k) distribution to a Traditional IRA and then convert to a Roth IRA.
• What happens to my Roth IRA if I die?
Distributions must be made from your Roth IRA after you die. If you have named a beneficiary, the funds will pass directly to your beneficiary(ies) without being subject to probate
If you have designated a beneficiary, then distributions must begin starting at least one year from the date of your death. Annual distributions must be made in an amount not less than the Roth IRA account balance multiplied by a fraction with one as the numerator and your beneficiary's life expectancy as the denominator.
If you have not designated a beneficiary, distributions must be completed within five years.
If your primary beneficiary is your spouse, he/she is given the added option of either assuming your Roth IRA or rolling it over to a Roth IRA in his/her name.
The amount in your Roth IRA when you die may be subject to estate tax if your estate, including the remaining amount in the Roth IRA, is significant. If you believe that your estate may be that significant, you should consult your tax advisor.
• May I borrow from my IRA or use it as collateral?
No. You cannot borrow from your IRA. Using your IRA for collateral will cause the portion of the IRA used as collateral to become taxable and may cause penalty taxes.
IRAs receive special treatment from the IRS because you do not have use of those funds. If you could pledge them as collateral, you would effectively have use.
• Can individuals 50 or older make additional IRA contributions?
Individuals age 50 and older can make an additional "catch-up" contribution of $1,000 in excess of the annual IRA contribution limit.
• What are the three primary types of IRAs?
There are three primary types of IRAs:
Coverdell Education Savings Account
• Why should I open an IRA?
You should strongly consider opening an IRA because it is one of the simplest, most effective ways to save for retirement. An IRA can help you save more than a regular savings account because it reduces your taxable income and separates your retirement savings from other funds. The sooner you start saving,the more wealth you will build for retirement, because of the power of compound interest. You can open your IRA downtown at the main office or at the branch office in Hermantown.
• Can I deduct my Roth IRA contribution?
No, contributions to a Roth IRA are not tax deductible.
A Roth IRA allows you (if you do not exceed certain income limits) to invest money by making non-deductible contributions that grow tax-deferred.
• What is a Coverdell Education Savings Account (formerly Education IRA) and who's eligible to contribute?
A Coverdell Education Savings Account (ESA) is a type of IRA that allows you to make nondeductible contributions up to $2,000 annually for anyone under the age of 18 or a special needs beneficiary. Assets in a Coverdell ESA must be used for qualified education expenses before your child (the designated beneficiary) turns 30 in order to be withdrawn tax-free.
Qualified education expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses, including tuition, fees, books, supplies and equipment as well as room and board (allowable if the designated beneficiary is at least a half-time student at an eligible educational institution).
Tax-free earnings. Contributions to a Coverdell ESA are not tax-deductible; however, all earnings accumulate on a tax-deferred basis and can be withdrawn tax-free as well, if used for qualified higher education expenses.
Who's Eligible. Anyone can contribute up to $2,000 per child under the age of 18 for a Coverdell ESA as long as his or her income does not exceed the limits. Single tax filers with annual adjusted gross income (AGI) up to $110,000 or married couples with AGI up to $220,000 are eligible to make the maximum annual contribution to a Coverdell ESA. You have until the due date of your tax return (not counting extensions) to contribute to a Coverdell ESA.
Withdrawals. Distributions are tax free if used to pay for qualified education expenses. Funds must be spent or paid to the beneficiary within 30 days of their 30th birthday. Any withdrawals not used for qualified education expenses are subject to both income taxes and a 10% IRS penalty.
• When am I required to begin taking distributions from a Traditional IRA?
You are required to begin taking distributions from a Traditional IRA by April 1st of the year after you turn 70 1/2.
• Am I required to make IRA contributions every year once I start?
No, you don't need to make contributions to your IRA every year, nor are you required to make the maximum contribution in any year. Contribute as you wish, as long as you don't exceed the annual limits.
• What is a Traditional IRA? Who can contribute and what are the limits?
An IRA is an Individual Retirement Account that provides several tax benefits.
This article will focus on the Traditional IRA. Please refer to the related links for information aboutthe other types of IRAs available.
The Traditional IRA was introduced more than 20 years ago and enables individuals to save money in a tax-deferred account. What that means is that the earning from your IRA account earnings will not betaxed until you begin taking money outof the account. Each year, regardless of your income, you can invest up to the maximum annual contributionlimit (see table below) or 100% of your earned income, whichever is less. IRA accounts can becomprised of fixed income instruments, such as CDs/share certificatesand bonds, and stocks and mutual funds, to namejust a few options.
The money you contribute to your IRA may or may not be deductible from your taxable income. Tax deductibilityof contributions depends on your income and ifyou or your spouse participate in a workplace retirement plan.
If neither you nor yours pouse is an "active participant" in an employer-sponsored retirement plan, you both may deduct yourentire contribution, up to your applicable limit as established by the IRS. The W-2 Form you receive each year from your employer should indicate whether or not you're considered an active participant. Check with your employer if you're unclear about your status.
However, if either you or your spouse participates in an employer-sponsored retirement plan, you may deduct your contribution only if your adjusted gross income falls within certain ranges.
2010 Combined Traditionaland Roth IRA Contribution Limits
If you are 50 years of age or older before 2010: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2009. This limit can be split between a traditional anda Roth IRA but the combined limit is $6,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.
2010 Tax Year
For 2010, if you are covered by a retirement plan atwork, your deduction for contributions to a traditional IRA is reduced (phasedout) if your modified AGI is:
More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),
More than $56,000 but less than $66,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.
For 2010, if you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI ismore than $167,000 but less than $177,000. If your modified AGI is $177,000 or more, you cannot take a deduction for contributions to a traditional IRA.
Conversions to Roth IRAs. Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are eliminated. Also, for any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would be included as income will be included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010.
• What is the deadline for opening and making contributions to an IRA?
You have until April 15th (unless it falls on a weekend) of the year following the tax year to open and fund an IRA for the previous year.
• Can I access the money in a Traditional IRA before I retire?
Yes, you can access the money in a traditional IRA before you retire, but in most cases there are penalties associated with doing so. If you withdraw funds prior to age 59-1/2 from a traditional IRA, they will be taxed at ordinary income tax rates. Withdrawals prior to age 59-1/2 will also be subject to a 10% penalty from the IRS. Any funds withdrawn after age 59-1/2 are penalty-free.
The 10% penalty for withdrawing funds prior to age 59-1/2 is waived for any withdrawals due to:
- the IRA owner's disability
- the IRA owner's death
- a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner
- unreimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI)
- medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks
- costs of a first-time home purchase (subject to a lifetime limit of $10,000)
- qualified expenses of higher education for the IRA owner and/or eligible family members
- pay back taxes because of an Internal Revenue Service levy placed against the IRA
Withdrawals at any time for any reason are subject to income tax. If non-deductible contributions were made to a traditional IRA, part of any withdrawal from that IRA will not be taxed.
• Can I still contribute to a Roth IRA if I'm older than 70-1/2 and I'm still working?
Yes, you can still contribute to a Roth IRA after 70-1/2, provided the contribution does not exceed your earned income for the year and you meet Adjusted Gross Income (AGI) eligibility guidelines.
• Can my spouse and I have separate IRAs?
Yes, IRAs are individual retirement accounts, available to both you and your spouse. Recent IRA rules allow normal contributions even if only one spouse is earning income, so long as you meet the income limitations.
This is true for both Traditional & Roth IRAs.
• Can I contribute to a Traditional IRA and a Roth IRA in the same tax year?
Yes, you can contribute to both IRA types in the same tax year. However, it is important to note that your combined Traditional and Roth IRA contributions may not exceed the maximum contribution limit in a given tax year.
• Do you offer IRA Share CD's?
We offer Traditional and Roth IRA share CD's. The terms are 6, 12, 18, 24, 36 and 60 months. They can be set up for single maturity or to automatically renew at maturity. Please contact the credit union for the current rates. These can also be purchased at the Branch Office.
Note that MOR rates only apply to IRA certificates and not IRA share accounts.
• Can I transfer IRA funds from another financial Institution to my IRA at MPECU?
Yes, you can do a direct transfer. The check for the funds is made payable to the credit union for your benefit without any penalties. The funds need to be transferred into the same IRA type. For example; a Roth IRA to a Roth IRA, or a Traditional IRA to a Traditional IRA.
• What is the difference between a Traditional and a Roth IRA?
A Traditional IRA is a tax deferred savings account authorized by the Federal Government to encourage you to accumulate money for retirement.
Earnings that you accumulate inyour IRA remain tax deferred until you make withdrawals from the account.
Individuals underage 70½ and who have earned compensation may contribute to a Traditional IRA. The contribution limit is adjusted annually.
Your contribution may be tax deductible based onyour filing status, modified adjusted gross income, and if you participate in an employer sponsored retirement plan.
You can withdraw funds fromyour IRA any time after you reachage 59½ with no penalty. Distributions before age 59½ may be subject to a 10% early withdrawal penalty.
You are required to begin taking minimum distributions from your account at age 70½.
A Roth IRA is an individual retirement account to which participants are able to make annual nondeductible contributions. Unlike a Traditional IRA in which your earnings are tax deferred, Roth earnings can be tax free.
Individuals who have earned compensation may contribute, regardless of age, with maximum income eligibilitylimits, which are adjusted annually.
Contributions toa Roth IRA are not tax deductible.
You may withdraw you contributions at anytime, taxand penalty free.
“Qualified distributions” of your earnings may also be taken tax and penalty free.
Roth IRA owners are not required to take a distribution from their account at any age.
• What is the deadline to make IRA contributions?
The deadline to make regular contributions for a year is the deadline for filing that year"s federal income tax return. This is generally April 15th. If this day falls on a weekend or federal holiday, then the deadline is extended to the next day.