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Traditional and Roth Individual Retirement Accounts

This section provides the answers to common questions about Traditional and Roth Individual Retirement Accounts.

Traditional IRA:

Question: What is a traditional IRA?

Answer: A traditional IRA is a type of retirement plan that has been in existence since 1975. Traditional IRAs offer tax-deferred earnings, and the possibility of tax-deductible contributions. These tax advantages make the traditional IRA a powerful tool in creating a balanced, long-term savings plan.

Question: How does the traditional IRA work?

Answer: You can contribute to a traditional IRA if you earn compensation and you will not reach age 70 by the end of the year. If you file a joint tax return, you can treat your spouse’s compensation as your own (except your combined contributions cannot exceed your combined compensation). All earnings in the traditional IRA are not taxed until they are withdrawn. The ability to defer taxes on the earnings, and to withdraw in a year when you may be in a lower tax bracket, can mean more after-tax dollars for your retirement.

Question: How much can I contribute to a traditional IRA?

Answer: If you meet the eligibility requirements described in the previous questions and you are under age 50, you can contribute up to $4,000 for 2005 through 2007. For owners age 50 or older, your limits increase to $4,500 for 2005 and $5,000 for 2006 and 2007.

For further questions, please call us at 928.783.8881 or e-mail us at membercare@aeafcu.org and information will be mailed to you.

Roth IRA

Question: What is the Roth IRA?

Answer: The Roth IRA is an individual retirement account created by the Taxpayer Relief Act of 1997. Named for former Senate Finance Committee Chairman William Roth, JR., this IRA offers more incentives to boost your retirement savings, as well as more ways to use your nest egg.

Question: How does the Roth IRA work?

Answer: Unlike traditional IRAs, your contributions to a Roth IRA are never tax deductible. However, the money in your Roth IRA, including earnings, can be withdrawn tax-free. Of course, you must conform to the plan provisions to get this tax-free advantage.

Question: Am I eligible to contribute to a Roth IRA?

Answer: You are eligible if you earn compensation and your income is less than the limits set by Congress. A single filer who has a modified adjusted gross income (MAGI) of up to $95,000 can make the full Roth IRA contribution for that year. Each spouse filing a joint federal income tax return showing a MAGI of up to $150,000 can make the full Roth IRA contribution for that year. Some people with higher MAGI may be able to make smaller contributions.

Question: How much is the full Roth IRA contribution?

Answer: The amount of a full Roth IRA contribution varies. If you meet the eligibility tests described in the previous questions and you are under age 50, you can contribute up to $4,000 for 2005 through 2007. For owners age 50 or older, your limits increase to $4,500 for 2005 and $5,000 for 2006 and 2007.

Question: Can I have both a traditional IRA and a Roth IRA?

Answer: Yes, you can maintain both types of IRAs at the same time. You can even make contributions to both types of IRAs in the same year. But your contributions to both Roth IRAs and traditional IRAs cannot exceed the maximum contribution limit for all IRAs.

For further questions, please call us at 928.783.8881 or e-mail us at membercare@aeafcu.org and information will be mailed to you.

Would you also like to learn about the Coverdell Education IRA?

Traditional and Roth IRAs

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