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Quick Reference Guide
A quick reference guide for Traditional and Roth IRAs and Coverdell ESAs
Traditional IRAs have become increasingly popular due to expanded income limits allowing more individuals to make tax-deductible contributions. Penalty-free withdrawals for qualified higher education expenses and first-time home purchases are another attractive feature.
Contributions to a Roth IRA or Coverdell Education Savings Account (CESA) (formerly known as Education IRAs) are not tax-deductible but provide the opportunity for tax-free earnings. Your tax advisor can guide you on whether a Traditional IRA, Roth IRA or Coverdell ESA fits your needs. Of course, Credit Union staff are always here to answer your questions and assist in opening any of these accounts.
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Traditional IRA |
Roth IRA |
Coverdell ESA |
| Who can contribute? |
Anyone under age 70 1/2 who has income from compensation (or who is filing jointly with a spouse who earns compensation) |
Anyone who has income from compensation (or who is filing jointly with a spouse who earns compensation) with the following MAGI:*
- Up to $95,000 (single filers)
- Up to $150,000 (joint filers)
Reduced contributions allowed for higher incomes (up to $110,000 for single filers and $160,000 for joint filers)
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Anyone who has MAGI*
- Up to $95,000 (single filers)
- Up to $190,000 (joint filers)
People with higher MAGI* may be able to make smaller contributions.
Contributions after age 18 allowed for special needs beneficiaries.
Contributions can be made to a Coverdell ESA and to a state tuition program in the same year.
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| How much can I contribute? |
$4,000 per individual for 2005-2007.
Higher limit if age 50 or older.
Contribution cannot exceed compensation.
Contribution is reduced by contributions to Roth IRAs.
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$4,000 per individual for 2005-2007.
Higher limit if age 50 or older.
Contribution cannot exceed compensation.
Contribution is reduced by contributions to Traditional IRAs.
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$2,000 per child.
Limit applies to all Coverdell ESAs for the same child.
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| What are the tax advan- tages? |
Earnings grow tax-deferred until withdrawn.
Contributions may be tax-deductible.
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Regular contributions can be withdrawn tax- and penalty-free at any time.
After the account has been open five tax years, earnings can be withdrawn tax- and pentalty-free for any of these reasons: age 59 1/2, disability, death or a first-time home purchase.**
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Withdrawals for certain qualified education expenses are tax-free.
Special-needs beneficiaries can withdraw funds tax-free to pay for qualified education expenses at any age.
Qualified education expenses may include tuition, fees, books, computer equipment and technology required for elementary, secondary, and post-secondary education.
A beneficiary may receive tax-free distributions from a Coverdell ESA in the same year he or she claims the Lifetime Learning or HOPE Scholarship tax credits.
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*MAGI--modified adjusted gross income from the federal tax form
**Lifetime limit for exception on first-time home purchase is $10,000
Candidates For Conversion
"Should I convert my traditional IRA to a Roth IRA?"
If your adjusted gross income for the year will be $100,000 or less and you are either single or married and filing a joint tax return, you're eligible to convert your Traditional IRA to a Roth IRA. Whether you should depends on many factors, including (but not limited to) the following:
- How close you are to retirement
- Your tax bracket at retirement
- Your ability to pay taxes
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