Who qualifies for a tax-deductible Traditional Individual Retirement Account (IRA)?
Regardless of income, any individual with compensation from employment or earned income from self-employment and under age 70½ (or the spouse of a working individual) is eligible to contribute to a Traditional IRA. Contributions for an unmarried person are tax deductible if the individual is not an active participant in an employer-sponsored retirement plan. Those who are active plan participants must meet specified income limits to qualify for tax-deductible contributions. Income refers to Adjusted Gross Income, or AGI.

You may make and deduct the maximum contribution if your AGI is below the specified lower limit. If your AGI is above the specified limit, the amount you may contribute and deduct decreases ratably (but not below $200), until your AGI reaches the specified upper limit.

For instance, if you are single and an active participant in an employer-sponsored retirement plan in 2010, you may make the maximum tax-deductible contribution if your modified adjusted gross income (MAGI) is under $56,000. If your income is $59,000, you may make a partly deductible contribution, and if your modified adjusted gross income is over $66,000, you cannot make a deductible contribution.
If you are an Active Participant and your AGI is at or above the upper limit, you may not make any tax-deductible contributions to a Traditional IRA. However, you may still be eligible to make non-deductible contributions to a Traditional IRA, and you may be eligible to contribute to a Roth IRA.

What is the benefit of a tax-deductible Traditional IRA?
The main benefit is that all contributions are made with "pre-tax" dollars, meaning you deduct your contribution from current income, allowing you to save on taxes.

What is the maximum contribution I can make to a Traditional or Roth IRA?
The maximum contribution is $5,000 for 2010 or 2011 or 100% of your compensation, whichever is less. If you are eligible and choose to make contributions to both a Traditional IRA and a Roth IRA, the total of your contributions to both may not exceed the lesser of $5,000 for 2010 or 2011 or the 100% of compensation limit. In addition, catch-up contributions of $1,000 are permitted for any individual who is 50 or older.

Can non-wage-earning spouses make tax-deductible contributions to a Traditional IRA?
Yes. A spouse who does not earn income can contribute up to $5,000 for 2010 or 2011 ($6,000 if you are age 50 or older in 2010 or 2011) to a Traditional IRA and deduct the entire contribution from income reported on a joint tax return if the couple's combined modified adjusted gross income (MAGI) is less than or equal to $167,000 for 2010 (or $169,000 for 2011). If the couple's MAGI is between $167,000 and $177,000 in 2010 (or between $169,000 and $179,000 in 2011), the spouse's contribution may be partially deductible.

When can I withdraw money from my Traditional IRA?
You can withdraw money from a Traditional IRA at any time. However, you may be subject to ordinary income tax and an IRS imposed penalty tax. See next question for further information. You must begin taking mandatory distributions when you become age 70½.

How are Traditional IRA distributions taxed?
All earnings and deductible contributions become subject to tax on withdrawal. The tax rate is based on the individual's ordinary income tax rate at the time of withdrawal.

If your tax bracket is lower when you receive a distribution than when your IRA earned income, you benefit from tax savings in addition to tax deferral on the earnings.

Taxable distributions taken before you reach age 59½ are subject to a 10% federal penalty tax. Generally, distributions are not subject to the penalty tax if taken after age 59½, or on account of disability or death.

Penalty-free withdrawals are also allowed when they are made to cover:

• Qualified costs (including down payment and closing costs) for purchasing a first home, up to a $10,000 lifetime limit.
• Higher education expenses, including tuition and related costs.
• Medical expenses exceeding 7.5% of Adjusted Gross Income (AGI) in any given tax year.
• Medical insurance premiums during periods of unemployment, when an individual has been receiving either federal or state unemployment compensation benefits for at least a 12-week period (or a self-employed person could have received benefits but for being self-employed).
• Series of substantially equal periodic payments (72(t) method).

These penalty-free withdrawal costs may be incurred by you, your spouse or your children. In the case of first-time home purchases, the costs may be included by your grandchildren or ancestors, as well. For higher education expenses, grandchildren count as eligible family members.

Do I qualify to make contributions to a Roth IRA?
If you are single and have compensation from employment or earned income from self-employment and your modified adjusted gross income (MAGI) is less than $105,000 for 2010 (or $107,000 for 2011), you can make the maximum annual contribution, regardless of your age; if your MAGI is more than $105,000 but less than $120,000 in 2010 (or more than $107,000 but less than $122,000 in 2011), you can make a partial contribution.

If you are married and have compensation from employment or earned income from self-employment and have joint MAGI of up to $167,000 in 2010 (or $169,000 in 2011), you can make the maximum annual contribution, regardless of your age; if your MAGI is more than $167,000 but less than $177,000 in 2010 (or more than $169,000 but less than $179,000 in 2011), you can make a partial contribution.

If your federal filing status is "married, filing separately," you may not make a Roth IRA contribution if your MAGI exceeds $10,000.

For this purpose, MAGI is AGI modified to include certain earnings such as foreign earned income, and a married individual who has lived apart from his or her spouse for the entire taxable year and who files separately is treated as a single taxpayer.

What is the maximum contribution that can be made to a Roth IRA?
You can contribute up to $5,000 for 2010 or 2011 ($6,000 if you are age 50 or older in 2010 or 2011) or up to 100% of your compensation whichever is less. If you are eligible to do so, you may contribute to both a Traditional IRA and a Roth IRA in the same year, but the total amount you contribute cannot exceed the annual limits. Roth IRA contributions are not tax deductible.

Can non-wage-earning spouses make contributions to a Roth IRA?
Yes. A spouse who does not earn income but who files a joint federal income tax return can contribute up to $5,000 in 2010 or 2011 ($6,000 if you are age 50 or older in 2010 or 2011) to a Roth IRA based on the earned income of the joint filer and the MAGI on the joint return. These contributions are not deductible from current taxes.

Can I convert to a Roth IRA?
If a Roth IRA appeals to you, but your MAGI prevents you from contributing to a Roth, regulatory changes effective in 2010 make everyone eligible for a Roth IRA conversion, regardless of income level or tax filing status. So if you have funds in a Traditional IRA or employer-sponsored retirement plans, you can convert some or all of those assets to a Roth IRA.

Important Factors about a Roth Conversion:

You will need to pay taxes on the taxable amount (including deductible contributions and earnings) but the premature distribution penalty won’t apply.

For conversions completed in 2010, the client can include 50% of the income in 2011 and 50% of the income in 2012 at rates in effect in those years.

It’s important that you identify funds outside your retirement plan that can be used to pay the taxes due on the conversion to a Roth IRA. Tapping into the amount converted from a traditional IRA or employer-sponsored retirement plan to pay taxes will reduce the amount available in the Roth IRA to earn tax-free income—and trigger a 10% penalty if you’re under age 59 ½ (unless an exception to the penalty tax is available).

If the investment markets decline after conversion, resulting in a decrease in the value of the converted assets, you have the option of recharacterizing the account back to a Traditional IRA, in essence, undoing the conversion. The Roth IRA recharacterization must be completed by your tax-filing deadline plus extensions for the year of conversion.

When can money be withdrawn from a Roth IRA?
Money can be withdrawn at any time. However, earnings included in distributions taken prior to age 59 ½ may be subject to both income tax and a 10% federal penalty tax, as shown below in the next question. Conversion amounts may also be subject to the 10% penalty.

How are Roth IRA distributions taxed?
For the purpose of taxation, all distributions are considered to come from contributions first and earnings last. Since contributions are non-deductible, they are tax-free and penalty-free upon withdrawal at any time. Accumulated earnings may be subject to taxation according to the following rules:

Tax-free and penalty-free if held for five years or more and any one of the following:

• Over age 59 ½,
• Used for first-time home purchase (up to $10,000 lifetime maximum),
• Due to disability, or
• Distributed to beneficiaries upon IRA holder’s death.

Ordinary income tax on earnings when:

• One of the above exceptions applies but account is held for less than five years
• Used for qualified higher-education expenses incurred by the IRA holder or an immediate family member
• Used to cover medical expenses exceeding 7.5% of AGI
• Used to purchase health insurance after receiving unemployment compensation for more than 12 weeks
• The distribution is a qualified reservist distribution
• The distribution is a qualified disaster recovery or qualified recovery assistance distribution*

Ordinary income tax and 10% penalty on earnings when:

None of the above exceptions apply.

What are the eligibility requirements for establishing a Rollover IRA?
If you have been covered by your employer's retirement plan and are about to receive a qualified distribution from that plan, you may be eligible to establish a Rollover IRA. You may establish a Rollover IRA at any age.

Is there a limit on the amount I can roll over into an IRA?
Your rollover contribution must be in cash or in the form in which it is received. If you receive securities (or other property) from your employer's retirement plan, you may either roll over the securities or sell them and roll over the cash proceeds of the sale within 60 days. Any portion not rolled over by the 60-day deadline will be subject to federal income taxes and a 10% early withdrawal penalty (if under age 59 ½).

Your rollover contribution must be in cash or in the form in which it is received. If you receive securities (or other property) from your employer's retirement plan, you may either roll over the securities or sell them and roll over the cash proceeds of the sale within 60 days.

What are the benefits of establishing a Rollover IRA?
When you open a Rollover IRA to receive a qualified distribution, you can defer any current tax liability on that distribution and your funds can continue to grow on a tax-deferred basis until you withdraw them.