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Traditional IRA FAQs

Q.   What is a Traditional IRA?
A. A Traditional IRA is a type of retirement plan that has been in existence since 1975. Traditional IRA's 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.

Q. How does the Traditional IRA work?
A. You can contribute to a Traditional IRA if you earn compensation and you will not reach age 70 1/2 by the end of the year. If you file a joint tax return, you can treat your spouse's compensation as your own. All earnings in the Traditional IRA are not taxed until they are withdrawn. The ability to defer taxes on the earnings and to withdraw during a year when you may be in a lower tax bracket can earn more after-tax dollars for your retirement.

Q. How much can I contribute to a Traditional IRA?
A. For tax year 2002-2004, your total contributions to a Traditional IRA are up to $3,000/a year. For tax year 2005-2007, your total contributions to a Traditional IRA are up to $4,000/a year. For tax year 2008, your total contributions to a Traditional IRA are up to $5,000/ a year. After tax year 2008 limits will be adjusted annually for inflation in $500 increments.

Q. What is a "catch up" IRA contribution, and am I eligible?
A. 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 a Traditional IRA. The way they work is for the tax year 2002-2005, you can put extra $500 into your Traditional IRA beyond the regular contribution limit. For tax year 2006 and on, the catch-up contribution increases to $1000 above and beyond the regular contribution limit. The bottom line is a lot more money for your retirement goals.

Q. Can I still contribute to a Traditional IRA if I participate in an employer IRA-sponsored retirement plan?
A. 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). Higher income earners will, however, lose their ability to deduct their Traditional IRA contributions if participating an employer-sponsored plan.

Q. How much can I deduct?
A. If you are single or married and neither spouse is an active participant in a retirement plan, your Traditional IRA contributions are deductible regardless of your income. If you or your spouse is an active participant, you may deduct contributions only if your income is below certain limits. Partial deductions are available if income is within the phase-out range, which is determined by your filing status. Higher income earners with retirement plans may contribute, but deductions are not available if income is over the phase-out range. If you have questions about your specific tax situation, please consult your tax advisor for an interpretation of how these rules apply to you.

Q. If I make an early withdrawal from my Traditional IRA before age 59 , do I pay a penalty?
A. In general, you must pay a 10% tax on early distributions or withdrawals before age 59 . The early distribution tax does not apply in the following situations: (you must add amount of withdrawal to your total income when filing taxes)

  • Amount is rolled over or directly transferred to another Traditional IRA (one roll-over allowed per tax year, direct transfers are unlimited)
  • Amount is properly converted to a Roth IRA
  • Withdrawal is treated as the return of a nondeductible contribution
  • Payment is made to your beneficiaries after your death
  • Withdrawal of up to $10,000.00 is for first-time home purchase
  • Amount is used to pay for post-secondary education expenses
  • Amount is used to pay for catastrophic medical expenses
  • Amount is for pre-59 periodic payments
  • Distribution is to an owner who is disabled
  • Distribution is for medical insurance during unemployment

Q. When must I begin taking distributions from my Traditional IRA?
A. You must begin taking required distributions from your Traditional IRA at the age 70 . The minimum distributions each year will be computed using an IRS formula. You are allowed to delay the first year's payment until April 1 of the following year, but you will receive two year's worth of payments on your 71 year if you choose to delay.

Q. What are the benefits of having an IRA at my Credit Union?
A. There's a lot more to having an IRA than just getting tax advantages. It's your future, the key to your goals. You'll never have to worry about taking chances with your future when your IRA is at the Credit Union. Your savings are secure, and your money will always be there when you need it. The benefits of a Credit Union IRA are:
  • Competitive rates
  • No maintenance fees
  • Insured deposits
  • Payroll deduction to simplify contributions
  • Low minimum deposit requirements
  • Personalized answers to your questions
  • One-stop shopping for all your financial needs.

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