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Individual Retirement Accounts (IRAs) can be a great way to save for retirement and find a few tax breaks. No matter what your situation, there is probably an IRA that can help you save. Whether you are self-employed, looking to save for college, or trying to find another way to save tax-deferred dollars, an IRA can help you realize your goals. How can we help you save? Traditional IRA Roth IRA Coverdell Education Savings Account (formerly known as Education IRA) SEP IRA SIMPLE IRA

Traditional IRA
Anyone under age 70 1/2 who has earned income may contribute to a Traditional IRA. The amount you are eligible to contribute is the lesser of 100% of your compensation* or an amount that depends on whether you are age 50 or older. The following tables show maximum contribution limits for 2002 through 2010.

*Compensation is defined as income earned from performing material personal services including wages, salaries, fees, tips, bonuses, commissions, taxable alimony and separate maintenance payments.

**These limits must be reduced by any amount that you contributed to your Roth IRA for the same tax year.

Husbands and wives may each have an IRA, even if one person in that marriage is not working. Contributions may be made to a spousal IRA if certain rules are followed.

If you meet certain requirements, you may qualify for a tax credit when you make a contribution to an IRA. This tax credit reduces one's tax liability on a dollar-for-dollar basis. Ask a Peoples Trust & Savings IRA Specialist for more information on this credit or consult with your tax advisor.

The tax deduction for your IRA contribution depends on your filing status, whether or not you and/or your spouse is covered by an employer sponsored retirement plan at work, and your modified adjusted gross income (AGI).

• Single, not covered – Full deduction
• Married, neither you or spouse are covered – Full deduction

If you are single and you are covered under an employer-sponsored retirement plan, or if you are married and either you or your spouse is covered under an employer-sponsored retirement plan, then you will be entitled to only a partial deduction or no deduction depending on your income. Call an IRA Specialist or your tax advisor for more details. 

Non-deductible contributions may be made to a Traditional IRA. Even though a contribution may not be tax deductible, you still receive the tax benefit of tax deferral on the IRA's earnings.

Distributions may be taken out of a Traditional IRA any time, but money taken before the IRA owner reaches age 59 1/2 is considered an early distribution and is generally subject to a 10% penalty. The 10% penalty does not apply in certain situations. Some of these situations include death, disability, a first time home purchase and certain qualified higher education expenses.

A first-time homebuyer will be able to take an IRA distribution for home acquisition costs without incurring a 10% penalty tax. First-time homebuyers are defined as the accountholder, a spouse, child or grandchild of the accountholder.

Note: Distributions for first-time homebuyers will be limited to $10,000 for an individual's lifetime. In addition, if the purchase transaction falls through, the accountholder will have the ability to roll the funds back into the account within 120 days from disbursement of the funds.

Distributions to pay for current year education expenses will not be subject to a 10% penalty tax. Qualified education expenses include tuition, fees, books, supplies and equipment. If a student carries at least one-half of the normal full-time course load, expense amounts for room and board also can be included. Contact a tax advisor for details.

Note: Adjustments to the distributed amount will be made if a scholarship or a grant reduces an educational expense.

A Traditional IRA accountholder is required to start taking a minimum distribution by April 1 of the year following the calendar year in which you reach age 70 1/2 and by each December 31 thereafter. The amount that must be withdrawn is based on the IRA balance at the end of the prior calendar year and on a required minimum distribution schedule provided by the Internal Revenue Service.

For more details, speak to a Peoples Trust & Savings IRA Specialist.

Roth IRA
The tax advantages for a Roth IRA are different from a Traditional IRA. When you withdraw the money from a Roth IRA, none of it – including the earnings – will be taxed, assuming that the Roth has been open for at least five tax-years and you are taking a qualified distribution. (See below) Before that time, contributions, but not earnings, can be withdrawn tax free. Since earnings accumulate tax-free, Roth IRA contributions are not deductible from income.

Provided the qualified distribution rules are met, Roth IRAs allow accountholders and their heirs to avoid all federal income taxes on earnings for as long as the accountholders and heirs have the account. There are also no minimum distributions that need to be made at age 70 1/2.

With a Roth IRA, you pay no tax on withdrawals of account earnings if you have had the account for at least five years AND you meet one of the following qualifications:

• The accountholder is at least 59 1/2 years old.
• The accountholder is deceased or disabled.
• The funds will be used for a first-time home purchase.

IRS penalties and/or taxes will only be assessed on unqualified distributions of earnings.

You are eligible to contribute to a Roth IRA if you have earned income or compensation* and you meet certain income limitations. The combined contribution limits** are the same as the Traditional IRA, shown in the following schedule:

*Compensation is defined as income earned from performing material personal services including wages, salaries, fees, tips, bonuses, commissions, taxable alimony and separate maintenance payments.

**These limits must be reduced by any amount that you contributed to your Traditional IRA for the same tax year.

The income limitations are summarized in the following chart:

As with a Traditional IRA, you may be eligible to make a spousal contribution to a Roth IRA if certain rules are satisfied.

If you meet certain requirements, you may qualify for a tax credit when you make a contribution to an IRA. This tax credit reduces one's tax liability on a dollar-for-dollar basis. Ask a Peoples Trust & Savings IRA Specialist for more information on this credit or consult with your tax advisor.

Traditional IRA funds may be converted to a Roth IRA, provided you meet the AGI limitations. To do so, you will have to pay taxes on your the converted amount, but there will be no penalty for early withdrawal. Please consult your tax advisor if you are considering a conversion.

Coverdell Education Savings Account
Formerly called the Education IRA, the Coverdell Education Savings Account (ESA) has been enhanced to include higher contribution limits. In addition, the definition of qualified education expenses has been expanded.

A Coverdell Education Savings Account is a custodial account that is established for the purpose of paying qualified education expenses of a designated beneficiary of the account. A contributor is allowed to contribute up to $2,000 per year per beneficiary. As long as the contributor's income is not more than $190,000 (couples filing jointly) or $95,000 (single filing), you may contribute to a Coverdell Savings for a beneficiary (such as a child or grandchild) that is under the age of 18. If your income is above these limitations, you may be entitled to make a prorated contribution amount. You are also eligible to make separate contributions for different beneficiaries.

The income earned by or within Coverdell Education Savings Accounts will not be taxable when distributions are used to pay for qualified education expenses. Under the Economic Growth and Relief Reconciliation Act of 2001 (EGTRRA), distributions from a Coverdell Education Savings Account will be excluded from income tax (i.e. not subject to tax) to the extent that the distributions do not exceed the qualified education expenses incurred by the beneficiary of the account in the year of the distribution.

Contributions made to a Coverdell Savings are made with after-tax dollars so there is no tax deduction for contributions. The amount of educational expenses for which a distribution from a Coverdell ESA can be used and not be subject to the tax must be reduced by the amount of any qualified scholarship, educational assistance allowance, or payment that is excludable from the beneficiary's gross income.

If a distribution is not used for qualified education expenses, then the designated beneficiary will be liable to pay the 10% excise tax on that portion of the distribution that is taxable. The funds may be rolled over to another family member if the beneficiary decides not to use the funds for qualified education expense. All funds in the Coverdell Savings must be used by the time the beneficiary is 30 years of age.

Contributions for beneficiaries with special needs may be made after age 18 and the mandatory distribution age of 30 may be extended for a beneficiary with special needs.

A Peoples Trust & Savings IRA Specialist can give you more specific details on Coverdell Education Savings Accounts.

SEP IRA
A Simplified Employer Plan (SEP) is a retirement account established by your employer. An employer may consist of a sole business owner, a partnership or a corporation. 

A SEP is an arrangement through which employers can make contributions toward their employees' retirement income, including their own IRA. SEPs permit larger contributions than regular IRAs. 

A Peoples Trust & Savings IRA Specialist can give you more specific details on SEPs.

SIMPLE IRA
A Saving Incentive Match Plan for Employees of Small Employers (SIMPLE IRA) is an employer-sponsored retirement plan. To be eligible to have a SIMPLE IRA, you must employ 100 or fewer employees and you, the employer, cannot currently maintain another qualified plan. 

A sole proprietor may establish a SIMPLE IRA provided he meets certain requirements. This product allows an employee/participant to contribute funds from his or her own payroll and the employer can match the contribution up to a certain percentage of the employee's compensation. 

Limits exist as to how much the employer may contribute (i.e. electively defer) and there are limits as to the matching contribution the employer must make.

An employee may elect to defer an amount not to exceed the amount set forth in the following chart: 

An employee is not eligible to defer more than this chart indicates or more than his or her compensation.

Contributions to a SIMPLE IRA are excludable from the gross income of the employee.
The employer will be able to deduct both its elective deferral contributions and its matching contributions.

For more details, speak to a Peoples Trust & Savings IRA Specialist.

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