IRA Answers

Can I have both a traditional and a Roth IRA?

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 and traditional IRAs cannot exceed the maximum contribution.


Am I eligible to contribute to a Roth IRA?

You are eligible if you earn compensation and your income is less than limits set by Congress. A single filer who has modified adjusted gross income (MAGI) up to $112,000 can make the full Roth IRA contribution for that year. Each spouse filing a joint federal income tax return showing a MAGI up to $178,000 can make the full Roth IRA contribution for that year. Some people with higher MAGI may be able to make smaller contributions.



How does a Roth IRA work?

Unlike traditional IRAs, 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 However, the money in your Roth IRA, including earnings, can be withdrawn tax-free.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.



How much can I contribute to a Roth IRA?

If you meet the eligibility tests described above and you are under age 50, you can contribute up to $5,500 for 2013. For owners age 50 and older, your limits increase to $6,500 for 2013.



What is a Roth IRA?

A 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.



What happens if my (our) income is too high to make a full contribution to a Roth IRA?

A smaller contribution can be made if your MAGI is between $112,000 and $127,000 for single filers, and between $178,000 and $188,000 for joint filers. When income exceeds $127,000 for single filers and $188,000 for joint filers, a regular Roth IRA contribution cannot be made for that year.



Can I still contribute to a Roth IRA if I participate in an employer-sponsored retirement plan?

Yes, and you can contribute past age 70½ as long as you continue to earn compensation.


Will my Roth IRA affect the amount that I can contribute to my employer-sponsored retirement plan?

No. The amount you contribute to your 401(k) or other employer-sponsored plans will not be affected by your Roth IRA. However, you must conform to the plan contribution limits for your employer-sponsored plan.


When can I start taking tax-free distributions from my Roth IRA?

You can withdraw most contributions without paying income tax at any time. Distributions are treated as first being attributable to your contributions until all of your contributions have been distributed.


There are two requirements to qualify for tax-free withdrawals of the income your Roth IRA has earned. First, your Roth IRA must meet the "five-year test." In other words, it must be five years after the first year for which Roth contributions were made. Second, one of the following conditions must apply:

(a) You are over age 59½

(b) Funds are going to your beneficiary upon your death

(c) You have become disabled

(d) You are using the funds for a first-time home purchase (lifetime limit is $10,000 per person).

If you have made a conversion contribution, please read further for taxation issues regarding conversions.


Do I have to take minimum distributions when I reach age 70½?

No. The Roth IRA is more flexible than a traditional IRA because you are not required to start taking minimum distributions when you reach age 70½. If you don't need the cash, you can let your money continue to grow tax-free for as long as you like. However, minimum distributions must be made to your beneficiaries following your death.



What is a traditional IRA?

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 for tax-deductible contributions. These tax advantages make the traditional IRA a powerful tool in creating a balanced, long-term savings plan.



How does a traditional IRA work?

You can contribute to a traditional IRA if you earn compensation and you will not reach age 70½ 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 or contribution limit, whichever is less). All earnings in a 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.



How much can I contribute to a traditional IRA?

If you meet the eligibility tests described above and you are under age 50, you can contribute up to $5,500 for 2013. The annual contribution limit is $5,500. For owners age 50 and older, your limits increase to $6,500 for 2013.



Can I still contribute to a traditional IRA if I participate in an employer-sponsored retirement plan?

Yes, your participation in an employer-sponsored retirement plan will not affect your ability to contribute to a traditional IRA (assuming age and compensation requirements are met). However, higher-income earners will lose their ability to deduct their traditional IRA contributions if participating in an employer-sponsored plan.


If I already have a Roth IRA, can I have a traditional IRA, too?

Yes, you can. However, the limits on annual contributions described on the previous page apply to any combination of traditional and Roth IRA contributions that you make for the year.



What about income taxes when I withdraw from my traditional IRA?

You will owe income taxes when you withdraw from your traditional IRA. However, if you make nondeductible contributions to a traditional IRA, a portion of each withdrawal will be treated as the nontaxable return of these contributions.



If I make an early withdrawal from my traditional IRA before age 59½, do I pay a penalty?

In general, you must pay a ten percent tax on early distributions or withdrawals before age 59½. But the early distribution tax does not apply in the following situations:

a) Amount is rolled over or directly transferred to another traditional IRA

b) Amount is properly converted to a Roth IRA

c) Withdrawal of an excess contribution before the tax return is due

d) Withdrawal of an excess contribution after the filing deadline if certain conditions are met

e) Payment is made to your beneficiaries after your death

f) Withdrawal of up to $10,000 is for first-time home purchase

g) Amount is used to pay for qualified post-secondary education expenses

h) Amount is used to pay for medical expenses in excess of 7.5% of adjusted gross income (AGI)

i) Amount is for pre-59½ periodic payments

j) Distribution is to an owner who is disabled (as defined by the IRS code)

k) Distribution is for medical insurance premiums during unemployment that lasts 12 weeks or longer



When must I begin taking distributions from my traditional IRA?

You must begin taking required minimum distributions from your traditional IRA at age 70½. The minimum distributions each year will be computed using an IRS formula. You are allowed to delay the first year's payment until April 1st of the following year, but you will receive two years' worth of payments in your 71½ year if you choose to delay.


Can I move funds from a qualified retirement plan to a traditional IRA?

If you are entitled to receive an eligible rollover distribution from an employer's plan, you can continue deferring taxes by moving the money into a traditional IRA. The best way to do this is to inform the plan administrator that you want the funds moved directly to your traditional IRA in a direct rollover. The plan administrator will inform you before making an eligible rollover distribution.



Can I move money from a traditional IRA to a Roth IRA?

You can move money from your traditional IRA to a Roth IRA if your adjusted gross income for the year is $100,000 or less, and you are either single, or married and filing a joint tax return. In the year you convert, you will have to pay federal income taxes on the amount that you move, except the portion that is treated as the return of your traditional IRA basis. You may also be subject to state income taxes.



What happens to my traditional IRA after my death?

You may designate one or more beneficiaries to receive your IRA after your death. If your spouse is your beneficiary, he or she may directly transfer your traditional IRA to his or her own IRA tax-free. In addition, all beneficiaries have the option of taking a lump-sum payment or periodic payments over a number of years. Any tax-deferred money in your traditional IRA at the time of death will be taxed when it is distributed to your beneficiaries.



What is a Coverdell Education Savings Account (ESA)?

The Taxpayer Relief Act of 1997 created the Education IRA, now known as the Coverdell ESA. Its sole purpose is to help you pay for your child's education expenses, such as tuition, fees, books, supplies, equipment, and in some cases, room and board and computers. These options were improved by the Economic Growth and Tax Relief Reconciliation Act of 2001.



What is the deadline for making a Coverdell ESA contribution?

The deadline for making a Coverdell ESA contribution is the tax return deadline for the year for which the contribution is being made (usually April 15th of the following calendar year) not including extensions.


How does a Coverdell ESA work?

Unlike traditional IRAs, contributions to a Coverdell ESA are never tax-deductible. However, a Coverdell ESA offers you the potential for tax-free withdrawals, including earnings.



What is the most I can contribute to a Coverdell ESA?

The total contributions each year to each child's Coverdell ESA cannot exceed $2,000. If you're eligible, you can contribute the full amount for each child. For example, if you have three children and each has his or her own Coverdell ESA, you can contribute $6,000 ($2,000 to each ESA).



Who is eligible to open and contribute the full amount to a Coverdell ESA?

You can contribute the full amount if you are:

  • Single filer with modified adjusted gross income (MAGI) up to $95,000
  • Joint filer with MAGI up to $190,000


What happens if my (our) income is too high to make the full contribution to a Coverdell ESA?

You can make contributions of less than the full amount if you are:

  • Single filer with MAGI between $95,000 and $110,000
  • Joint filer with MAGI between $190,000 and $220,000

If your income exceeds these amounts, you cannot make a regular Coverdell ESA contribution for that year.



How long can I contribute to the account?

You can make contributions to a child's Coverdell ESA until he or she reaches the age of 18. This age limit does not apply to special needs beneficiaries. This is a person who requires additional time to complete his or her education because of a physical, mental or emotional condition (including a learning disability).



As a parent, am I the only one who can open and contribute to a Coverdell ESA for my child?

No. Anybody who meets the income requirements can open and contribute to your child's Coverdell ESA. This includes grandparents, aunts and uncles, family friends and anyone else who wants to pitch in to your child's education fund. Corporations, tax-exempt organizations and other entities can also make Coverdell ESA contributions, and there are no income limits on these contributors. However, the total annual contributions to all Coverdell ESAs for each child can't exceed $2,000.



Who controls the account?

Every Coverdell ESA must have one, and only one, "responsible individual" to oversee the account. This person decides when funds will be withdrawn and if and when funds will be rolled over to the Coverdell ESA of a family member. You can be the "responsible individual" as long as you are a parent or legal guardian of the child. The child can serve as the responsible individual after becoming an adult



When can I withdraw funds from a Coverdell ESA?

As the responsible individual, you can withdraw funds at any time. However, to avoid tax consequences from the withdrawal, you must use the funds to pay for qualified education expenses for your child (the ESA's designated beneficiary) before he or she reaches age 30 (except that the age 30 limit does not apply to a special needs beneficiary).



What educational expenses are considered to be "qualified"?

Qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at nearly any post-secondary educational institution (public, nonprofit or proprietary). Certain room and board expenses also may qualify. Qualified expenses also include these same expenses for elementary and secondary education, and the purchase of computer technology or equipment that is used by the beneficiary and the beneficiary's family while the beneficiary is in school.



What happens if my child doesn't use the funds?

If your child (the designated beneficiary of the ESA) decides not to go to college or leaves school before all the funds are withdrawn, you can roll unused funds into the Coverdell ESA of another child in your family. The beneficiary of the Coverdell ESA who receives the unused funds must be under the age of 30 (except that the age 30 limit does not apply to a special needs beneficiary).



Who is considered a family member for the purposes of a rollover?

Family members of the designated beneficiary who are eligible to receive unused funds include (but are not limited to) spouses, siblings, step-siblings, nieces, nephews, parents, aunts, uncles, grandparents, children and grandchildren. Of course, some of these categories will be eliminated immediately, since the new designated beneficiary must be under the age of 30 at the time of the rollover (except that the age 30 limit does not apply to a special needs beneficiary).



What if my child earns an academic scholarship and the tuition is waived?

The amount of scholarship money your child receives is deducted from the allowable expenses for the Coverdell ESA. For example, if qualified expenses total $6,000 and your child receives a scholarship for $3,000, you can make a qualified withdrawal of $3,000 from the Coverdell ESA. Remember that unused funds can always be rolled over into the Coverdell ESA of a family member.


Can I roll funds from a traditional or Roth IRA into a Coverdell ESA?

No, rollovers from a traditional or Roth IRA into a Coverdell ESA are not allowed.


How does the Coverdell ESA affect other education savings incentives?

Contributions can be made on behalf of the same child to both a Coverdell ESA and a qualified tuition (section 529) plan. A person can also receive tax-free distributions from a Coverdell ESA in the same year he or she claims the Lifetime Learning or HOPE Scholarship tax credits, but the same expenses cannot be used for more than one of these tax benefits.



If I contribute to a Coverdell ESA, can I still contribute to a traditional or Roth IRA?

Contributions to traditional or Roth IRAs have no effect on the contributions you can make to each Coverdell ESA.



Don't traditional and Roth IRAs allow me to withdraw funds for education expenses?

Traditional and Roth IRAs do offer penalty-free withdrawals for qualified higher-education expenses, but you may still need to pay taxes on those withdrawals. In contrast, withdrawals from a Coverdell ESA are both tax-free and penalty-free if used for qualified education expenses.