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Traditional IRAs and Roth IRAs

Posted on 28 December 2008 by Allgen Financial

Definition
A traditional IRA is a personal savings plan that offers tax benefits to encourage retirement savings. Contributions are either deductible or nondeductible. Regardless of whether your contributions are deductible, earnings in a traditional IRA grow tax deferred.

A Roth IRA is another type of personal retirement savings plan. All contributions to a Roth IRA are nondeductible. If certain conditions are met, withdrawals from a Roth IRA, including earnings, are tax free.

Traditional IRAs and Roth IRAs can be used to accumulate funds for college. The 10 percent penalty tax that normally applies to withdrawals from traditional and Roth IRAs before age 59½ does not apply if the money is used to pay the qualified education expenses of you, your spouse, or the children or grandchildren of you or your spouse.

Prerequisites
• You qualify to make contributions to a traditional IRA or Roth IRA
• You, your spouse, or the children or grandchildren of you or your spouse have qualified higher education expenses

Key Strengths
•    Early withdrawal penalty is waived
•    The federal government does not consider the value of your traditional IRA or Roth IRA in determining your child’s financial aid eligibility
Key Tradeoffs
•    Your retirement nest egg is reduced
•    Colleges may consider the value of your traditional IRA and Roth IRA before awarding their own financial aid

Variations from State to State
• States may vary in their tax treatment of traditional IRAs and Roth IRAs
• States vary in their protection of traditional IRAs and Roth IRAs from creditors

How Is It Implemented?
•    Open a traditional IRA or Roth IRA with a bank, financial institution, mutual fund company, life insurance company, or stockbroker
•    Select actual type of investment (e.g., certificate of deposit, mutual fund)
•    Make contributions as desired up to the due date of your federal tax return for that year (usually April 15 of the following year)
Article Written By: Forefield Inc.
Neither Forefield Inc. nor Forefield Advisor provides legal, taxation, or investment advice. All content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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Tags: 401k, 403(b), allowance, annuity payout, employer sponsorship, IRA, lump sum, option, penalty, retirement savings, Roth 401(k), Roth IRA, SEP-IRA, tax benefits, Tax-deferred annuities, taxation, traditional ira

Tax-Deferred Annuities: Are They Right for You?

Posted on 17 December 2008 by Allgen Financial

Tax-deferred annuities can be a valuable tool, particularly for retirement savings. However, they are not appropriate for everyone.

Five questions to consider

Think about each of the following questions. If you can answer yes to all of them, an annuity may be a good choice for you.

Are you making the maximum allowable pretax contribution to employer-sponsored retirement plans (a 401(k) or 403(b) plan through your employer, or a Keogh plan or SEP-IRA if you are self-employed), or to a deductible traditional IRA? These are tax-advantaged vehicles that should be fully utilized before you contribute to an annuity.
Are you making the maximum allowable contribution to a Roth IRA, Roth 401(k), or Roth 403(b), which provide additional tax benefits not available in a nonqualified annuity?
Will you need more retirement income than your current retirement plan(s) will provide? If you begin making the maximum allowable contributions to both a qualified plan and an IRA in your 30s or early 40s, you may have enough retirement income without an annuity.
Are you sure you won’t need the money until at least age 59½? Withdrawals from an annuity made before this age are usually subject to a 10 percent early withdrawal penalty tax on earnings levied by the IRS.
Will you take distributions from your annuity on an ongoing basis throughout your retirement? You typically have the option of making a lump-sum withdrawal from an annuity, but this is almost always a bad idea. If you do, you’ll have to pay taxes on all of the earnings that have built up over the years. If you take gradual distributions, you pay taxes a little at a time, allowing the rest of the money to continue growing tax deferred. In addition, if the annuity is nonqualified and you elect to receive an annuity payout, you will enjoy an exclusion allowance on each payment, in which a portion of each payment is considered a return of principal and is not taxable.

Article Written By: Forefield Inc.
Neither Forefield Inc. nor Forefield Advisor provides legal, taxation, or investment advice. All content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources.