Retirement and College Savings Plans - IRA Rules and Regulations

IRA Contributions and Catch-Ups
After 2002, IRA owners 50 years of age and over were allowed an extra $500 contribution per year for Traditional and Roth IRA accounts. This "catch-up" amount increased to $1,000 in 2006. In order to qualify for the catch-up contribution, the investor must reach age 50 by the end of the specific contribution year.

YEAR Contribution Catch-up
2005 $4,000 $500
2006-2007 $4,000 $1,000
2008 $5,000 $1,000
2009 Indexed for inflation $1,000

Look Out!
The limits above apply jointly to both Traditional and Roth IRAs. For example, a 40-year-old can contribute a maximum of $4,000 in 2006 - he or she could contribute $1,000 to a Traditional IRA and $3,000 to a Roth IRA, but not $4,000 to each.

Exam Tips and Tricks
The exam may refer to 2005 or 2006 contribution or catch-up amounts. Be sure to read the question carefully, and make sure you are answering for the correct year.

IRA Rollovers and Transfers
The IRS allows investors to transfer funds between like IRAs without incurring taxes. For example, your client could transfer funds from a Traditional IRA at Bank A to a Traditional IRA at Broker B without any tax consequences. Investors may also roll over distributions from qualified retirement plans to Traditional IRAs without causing any tax consequences. The investor could take a withdrawal from the IRA and be able to deposit all or part of that amount into another IRA or qualified plan within 60 days of receipt. Rollovers are allowed only once every 12 months, while transfers are not limited.

Penalties for Early Withdrawals from and Excess Contributions to IRAs
If an investor withdraws money from an IRA before reaching the age of 59.5, he or she will pay a 10% tax penalty on the amount withdrawn and will be liable for ordinary income taxes on the withdrawal. If the individual contributes too much to an IRA, a 6% penalty is assessed.

IRA owners will not be subject to the early-withdrawal tax penalty if they meet any of the following exceptions to the 59.5 and over rule:

  • The IRA owner becomes disabled.

  • The beneficiary withdraws funds from the IRA after the IRA owner's death.

  • The IRA owner needs money to cover medical expenses not covered by insurance or for medical insurance premiums when the owner is unemployed.

  • The IRA money, limited to $10,000, is used towards the purchase of a first home.

  • The IRA owner or a member of his or her immediate family needs money to pay for qualified higher education expenses, including tuition, room and board, books, and other educational fees.

  • Withdrawals are made in a series of "substantially equal periodic payments" over the owner's life expectancy.

  • An additional difference between the Roth and Traditional IRA exists: withdrawals from a Roth IRA are considered to be made from contributions first. Therefore, penalties and restrictions apply only to earnings in the Roth IRA

IRA Conversions
Individual investors with an AGI of $100,000 or less, whether single or married, can convert a Traditional IRA to a Roth IRA. While they will not have to pay the 10% tax penalty assessed for early withdrawals, they will have to pay ordinary income taxes on the amount converted to the Roth. Whether or not this conversion should take place will depend on a number of individual factors, such as:

  • the investor's anticipated tax bracket at retirement.
  • the length of time until withdrawals from the IRA begin.
  • the availability of cash to pay taxes due upon conversion.
  • the effect of the eventual IRA distribution on Social Security benefits.
College Savings Plans
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