Open an IRA Account
Are
you CHANGING YOUR JOB?
We will help you Rollover your 401(k) savings to an
IRA.
What
Does I.R.A. Really Mean?
Well,
in this country, we’re not referring to the Irish Republican
Army. Actually, we’re talking about an Individual Retirement
Account. Or an Individual Retirement Annuity (see below)…
and even these terms can be confusing. After all, what does
an Education IRA have to do with retirement? And who is that
Roth guy, anyway? Isn’t “Rollover” something
my dog does? Let’s take a closer look.
First,
one thing most IRAs have in common is special tax treatment.
That might mean tax-deferred growth (which means you don’t
pay taxes on your investment or its earnings until you withdraw
the money) or tax-free growth, which means you’ve already
paid the taxes on your IRA investment, but (as long as you
follow certain guidelines), you won’t pay taxes on your
investment earnings when you make a withdrawal. See the box
below for more clarification and important information about
how different IRAs work in relation to each other and the
tax codes, and clarification about special tax treatments.
The
other feature that brings these – seemingly dissimilar
– arrangements together is that the “I”
in IRA stands for “Individual”. An IRA is an arrangement
you make for yourself, not through an employer – like
a payroll-deduct retirement plan, or flexible spending account.
To the general public, the term “IRA” has come
to mean, simply, a personal account that enjoys some sort
of special tax treatment (again, see the box below for important
clarifications).
That
said (or written!), let’s take a look at the different
kinds of IRAs that are available to you:
|
Traditional
IRA |
Roth
IRA |
Rollover
IRA |
Coverdell
Education Savings Account
(formerly Education IRA |
Who's
Eligible |
People
not covered by an employer's retirement plan |
Based
on income, may participate in employer's plan |
Participants
in an employer plan who are changing employers or retiring.
Rollovers are also accepted from other IRAs and Roth IRAs
and Simplified Employee Pension (SEP) Plans |
Beneficiaries
under age 18 (Education IRAs cannot accept contributions
on behalf of beneficiaries older than 18) |
Key
Feature |
Tax-
deferred investment and earnings growth |
Tax-free
investment growth |
Protects
Tax-deffered status of Employer Plan. |
Tax-deffered
growth of investment earnings; Tax-free widrawals for
qualified education expenses |
Contribution
Limit
(Pre-tax eligibility subject to income limit) |
2002-2004:
$3,000
2005-2007:$4,000
2008-2010(1): $5,000 |
Post-tax:
2002-2004: $3,000
2005-2007:$4,000
2008-2010: $5,000 |
No
limit ( for pre-tax rollovers) See traditional or Roth
IRA for yearly limits for additional contributions |
Up
to $2,000 per year (except for rollovers from other Education
IRAs); subject to income limitations |
Tax
deductible contributions |
Yes,
depending on income |
No |
Yes
depending on income |
No |
Minimum
age to start taking income
(Without penalty) |
Age
59 ½ |
Age
59 ½ |
Age
59 ½ |
n/a |
Must
start taking withdrawals by |
Age
70 ½ |
n/a |
Age
70 ½ |
Age
30 (Remaining funds may be rolled into a Coverdell Account
for Another beneficiary |
Withdrawals
taxable? |
Yes,
on earning and Pre-tax contributions |
No,
if funds invested five or more years |
Yes,
on earnings and pre-tax contributions |
Not
if withdrawn for qualified education expenses |
(1) After 2008, indexed in $500 increments
for cost-of-living adjustments.
Important
Definitions and Information about IRAs
Tax-deferred
– This means you don’t pay taxes on your IRA investment,
or its earnings, until you actually withdraw your money. IRAs
and other qualified plans already offer the same tax-deferral
feature found in annuities. Your investment is taxable at
withdrawal, and may be subject to an additional 10 percent
early withdrawal penalty if you withdraw it before you reach
age 59 ½.
Tax-free
growth – With a Roth or Education IRA, you’ve
already paid taxes on the money you invest in your IRA, and
you pay no taxes on its investment growth, assuming (with
a Roth) that it’s been invested for at least five years
and you’ve reached 59 ½, or (with a Coverdell
Education Savings Account) that it’s withdrawn for qualified
educational expenses.
Annuity
– An insurance contract that usually offers a range
of investment options, benefits and features. For example,
you can purchase guaranteed death benefits or payout options,
which are based on the claims-paying ability of the issuing
insurance company. For additional fees, you can choose death
benefit protection and the ability to receive a life-time
income.
Timing
– Isn’t – Everything!
Market
timing. Excessive or frequent trading. Mutual fund scandal.
These phrases, and the actions they represent, have consumed
the recent media. Careers in the financial arena are crumbling
as companies are accused of abuses and regulatory agencies
are bearing down with increased scrutiny on the practices
and managers who have accommodated them.
At
the highest level, “market timing” means attempting
to follow market activity to successfully “buy low”
and “sell high.” The term is typically used for
people who quickly buy and sell securities to grab profits
from short-term price changes. But it’s a little different
in mutual funds, which are usually geared to long-term investors
– people investing for retirement or education costs.
When someone trades in and out of a fund too frequently, it
may hurt the fund’s overall performance and burn other
shareholders practicing disciplined long-term investing.
While
market timing is not illegal, many funds have increasingly
discouraged the practice because it threatens to increase
costs, hurt fund performance and disadvantage long-term shareholders,
because money doesn’t stay invested in the fund. It
flows in one day and out the next. That means the funds need
to hold additional cash reserves to cover the frequent trading,
with fewer dollars available to invest on behalf of all shareholders.
Excessive trading can also result in higher transaction costs,
which increase the fund’s expenses, and potentially
reduce returns for the long-term investor.
IRA
stands for:
A)
Irish Republican Army
B) Individual Retirement Account
C) Interest Receiving Account
A
Rollover is:
A)
Moving money from one tax-favored plan into another
B) Something you teach your dog Rover to do
C) Something you can only do with an IRA
Market
Timing is:
A)
Calculating how long it takes you to walk from one end of
the NYSE floor to the other
B) Leaving your stock investments in the market until you
reach your financial goals
C) Practicing “buy low, sell high” on a minute-to-minute
basis, jeopardizing fund trading privileges
A
Coverdell Education Savings Account is:
A)
The same thing as a 529 Plan
B) An IRA that can be used as a shorter-term investment for
goals like tuition funding
C) How the Coverdell family saves for tuition
Tax-deferred
growth means:
A)
The growth of your investment is halted until you pay taxes
B) You no longer need an accountant
C) You don’t pay taxes on your investment until the
money is withdrawn
IRA
stands for… Answer: B A Rollover is… Answer: A
Market Timing is…Answer: C
An Education IRA is… Answer: B Tax Deferred growth means…
Answer: C
Please
note that the precise coverage afforded is subject to the
terms, conditions, and exclusions of the contract as issued.
This explanation is intended only as a guideline. This information
is not intended to be considered investment, tax or legal
advice. It is provided, for your education only. This is not
an IRA contract. All terms and coverages are defined solely
by your policy.
For
more details, please call a PaulBalep representative toll-free
1-800-964-8614 to receive a free, no-obligation proposal.
Like so many satisfied clients, we think you’ll be happy
you did. And to set up a meeting to discuss additional insurance
and financial goals: Visit us online at www.paulbalep.com,
or e-mail us at info@paulbalep.com.
“It
pays to shop around with PaulBalep Your one stop shop
for insurance and financial services”
<<Independence
is number one>>.
We are nonexclusive producers who represent an average of
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and compare the products of several fine companies to find
you the right combination of coverage and value.
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