Traditional IRAs
Contributions may be made up to the year you turn age 70 as long as you have earned income; a nonworking spouse of a wage earner may also contribute up to the year the nonworking spouse turns age 70 . The maximum annual contribution is $3,000 if you are under age 50 or there is a Catch-Up contribution for individuals age 50 or older of $3,500 per year or 100% of your earned income, whichever is less. Required minimum distributions (RMDs) must start at age 70.
There is no marriage penalty. One spouses active participation in an employer provided pension plan such as a 401(k) does not affect the other spouses status for contribution deductibility.
There is an early withdrawal IRS 10% penalty tax if you're under age 59. Exceptions to this withdrawal penalty are: 1) first time home purchases (up to a lifetime of $10,000), 2) if you become disabled, and/or 3) higher education expenses.
Deposits are often tax-deductible, so the owner pays less in income taxes in the year he/she contributes. Earnings are always tax-deferred until withdrawn.
Roth IRAs
Anyone can make contributions as long as they have earned income or are a nonworking spouse of a wage earner. The Roth IRA, like the Traditional IRA, has a maximum annual contribution limit of $3,000 if under age 50, or $3,500 Catch-Up per year if over age 50 or 100% of your earned income, whichever is less.
An early withdrawal IRS 10% penalty tax applies on distributions of earnings or accounts held less than 5 years and the owner is under age 59. Exceptions to this withdrawal penalty are: 1) if you become disabled and/or 2) for first-time home purchases (up to a lifetime limit of $10,000).
Unlike Traditional IRAs, the Roth IRA allows you to make contributions after the age of 70. The Roth IRA does not require mandatory minimum distributions once you reach age 70. Roth IRA contributions are non-deductible. Withdrawals of both contributions and earned dividends are tax-free after age 59 as long as the money has been in the account for five years.
Converting Traditional IRAs to a Roth IRA:
You can convert your Traditional IRAs to a Roth IRA using special rules developed by the IRS. Amounts in Traditional IRAs can be transferred to Roth IRAs provided the tax payer's Adjusted Gross Income is $100,000 or less for the year in which the transfer is made. Part of the transferred amount is subject to income tax, but is exempt from IRS early withdrawal penalties.
SEP Plan
Self-employed people and owners of small businesses are eligible to participate a SEP Plan.
Contributions are tax-deferred for individuals. Business tax deductions are available for employers making employee contributions.
Employers may contribute up to 25% of compensation or $40,000, whichever is less. Employees may make individual IRA contributions to a SEP account based on Traditional IRA limits and eligibility. Contributions can be deducted from employers federal taxable income. Employee IRA contributions to the SEP account are subject to Traditional IRA deductibility rules.
There is an early withdrawal IRS 10% penalty tax if you're under age 59 and the withdrawal does not qualify as an exception to the tax. Required minimum distributions (RMDs) must start at age 70.
Coverdell Education Savings Accounts (CESAs)
There is a maximum annual contribution of $2,000 per child (single incomes under $95,000; joint $190,000) until the child reaches 18 years of age (does not apply to special needs children).There are no requirements that a contributor have earned income or be under a certain age. Withdrawals of both contributions and earned dividends are tax-free if used for education expenses (tuition, fees, and room and board at an eligible higher education institution, elementary school or secondary school).
CESAs are non-deductible.
