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There are two types of IRAs for individuals, the Roth IRA and the Traditional IRA. Each IRA has advantages and can help you reach your retirement goals.
The Traditional IRA offers tax-deferred growth — which means you do not pay taxes on the earnings in your IRA until you withdraw them. Also, depending on your income level, your contributions to a Traditional IRA may be tax deductible.
The Roth IRA, contributions are made on an after tax basis, earnings grow tax-free and any withdrawals are free from Federal taxes assuming you are age 59½ and have held the account for at least 5 years. Eligibility for the Roth IRA depends on income, in the chart below.
See the detailed grid below to help you compare the two so you can see which is right for you. If you have any questions, call our dedicated Financial Advisors for assistance toll free at 1-866-218-6142.
| Traditional IRA | Roth IRA | |
|---|---|---|
| Who is eligible? | Anyone who has earned income may contribute up until the year they turn age 70½ A non-working spouse of a wage earner can contribute up until the year they turn age 70½ |
Generally you can contribute to a Roth IRA if you have earned income and your modified AGI is less than $114,000, if single, and less than $166,000 if married and filing jointly (2007 limits). For 2008 the limits are $116,000 for single and $169,000 for married filing jointly. A non-working spouse of a wage earner may also be eligible to contribute. |
| Is There an Age Limit? | You can contribute up until the year you turn 70½ | There is no age limit |
| How Much Can You Contribute? | If you are 50 or older you can contribute up to $5,000 for tax year 2007 and up to $6,000 for 2008. For a married couple filing a joint federal tax return you can contribute up to $10,000 for tax year 2007 and up to $12,000 for tax year 2008 (assuming both are over 50). If you are below 50 years of age, the maximum annual contribution is $4,000 ($8,000 if you are married filing jointly) for tax year 2007, and $5,000 ($10,000 is you are married filing jointly) for 2008. |
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| Are Contributions Tax Deductible? |
The maximum annual contribution amount is subject to earned income limitations and is based on your age. However, if you or your spouse are active participants in an employer maintained retirement plan, your deduction may be limited or eliminated. Individuals 50 or older can contribute up to $5,000 for tax year 2007 and up to $6,000 for tax year 2008. Individuals younger than 50 years of age can contribute up to $4,000 for tax year 2007 and up to $5,000 for tax year 2008. Married couples filing a joint federal tax return can contribute to each spouses IRA account subject to earned income limitations and eligibility requirements. The maximum contribution amounts for tax years 2007 and 2008 are listed below: Both spouses 50 or older: up to $10,000 for 2007 and $12,000 for 2008 One spouse is younger than 50, one spouse 50+: up to $9,000 for 2007 and $11,000 for 2008 Both spouses younger than 50: up to $8,000 for 2007 and $10,000 for 2008 |
Contributions are made on an after tax basis, they are not tax deductible. |
| How Are Earnings Taxed? | Earnings grow tax-deferred until you begin withdrawing funds. At that point they are taxed as ordinary income. | Earnings grow tax-free and when you make withdrawals there are no Federal taxes due as long as you are age 59½ and have held the account for 5 years. |
| How Can You Take Withdrawals? | All earnings and deductible contributions are taxable upon withdrawal. Under certain conditions, there are penalties if withdrawals are taken before age 59½ or if withdrawals are not taken by age 70½ The amount of any non-deductibe contributions are not taxable when withdrawn |
Contributions can be withdrawn at any time without taxes or penalties. Earnings can be withdrawn without taxes or penalties if you are at least age 59½ and your account has been open for at least 5 years. |
| Are There Distribution Requirements? | Required minimum distributions upon reaching age 70½ | There are no distribution requirements |
| Are there Exceptions to the Withdrawal Penalties? | Some exceptions are made if funds are used for things such as a first-time home purchase, education or certain medical expenses. For a full explanation of exceptions please call our dedicated Financial Advisors at 1-866-218-6142. | |
| What are the Investment Options? | You have the option of investing in any of the 5 AARP Funds. Each fund has low fees which can make a big difference in you returns over time. Read more about the 5 AARP Funds. | |
| How Much does it cost to get started? | You can establish your AARP Funds IRA with as little as $100. If you choose to set up an Automatic Investment Program, you can establish your IRA with an initial investment of $25 with automatic subsequent investments of at least $25. |
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| What is the Cost? | The cost is $10/year per fund in your IRA account. | |
| Is There Assistance Available? | If you have any questions about which IRA is right for you, or which fund to invest in, help is just a phone call away. Call our dedicated Financial Advisors for assistance toll free at 1-866-218-6142. |
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