Planning your future

Your retirement years can be among life’s most rewarding. But enjoying them to their fullest requires proper planning well in advance. Selecting appropriate savings alternatives is key to helping you accomplish your goals and ensuring the security you’ve worked for provides the retirement you’ve always envisioned.

The individual retirement account (IRA) is one particularly valuable savings tool that can help meet your objectives. This page will help you gain a better understanding of the basic features of the two main types of IRAs – the traditional IRA and the Roth IRA. The information here, complemented by the in-depth knowledge of Raymond James financial advisors, can help you develop the right plan to help you reach your goals.

Time is money: This chart below illustrates the potential cost of delaying asset accumulation for retirement. Waiting one year costs more than $50,000, while delaying five years means losing out on more than $200,000.

This is a hypothetical example and is not intended to represent the performance of any specific security or portfolio. Withdrawals are subject to income taxes and, if withdrawn prior to age 59½, may also be subject to a 10% federal penalty.

Frequently asked questions

Who can make a contribution to a Roth IRA?

Single taxpayers with adjusted gross incomes (AGI) of less than $110,000 or married taxpayers filing jointly with AGIs of less than $173,000 may each make a full contribution. For single filers, the allowed contribution is phased out for AGIs between $110,000 and $125,000. For married individuals, the allowed contribution is phased out for AGIs between $173,000 and $183,000. No contribution is allowed if an individual is married and files separately, unless the AGI is under $10,000.

Can I convert my current IRA into a Roth IRA?

Yes. An individual can roll over a traditional IRA to a Roth IRA.

Can I convert an IRA to which I made nondeductible contributions?

Yes. However, income tax is due on the distribution amount less any nondeductible contributions.

Can I convert after starting my age 70½ required distribution?

Yes. The amount of the required minimum distribution from the traditional IRA for that year cannot be included, but the remaining account balance can be converted or rolled over to a Roth IRA.

Can I contribute to both a traditional and a Roth IRA?

Yes, but the combined contribution limit is $5,000, or $6,000 for those age 50 and older.

What are the deductibility rules for traditional IRAs?

For single taxpayers, the threshold for full deductibility is $58,000 for 2012. The deduction is incrementally reduced for AGIs above $58,000, reaching zero at $68,000. For spouses filing jointly, the deductibility threshold is $92,000 for 2012, with the range for the incremental reduction stretched from $10,000 to $20,000. Thus, starting in 2012, the deductibility is phased out with AGIs between $92,000 and $112,000.

Is there a penalty for early withdrawal from a traditional IRA?

Yes. However, certain distributions are exempt from the 10% premature distribution penalty. Withdrawals made before attainment of age 59½ are exempt from the penalty if made:

• For the first-time purchase of a home (lifetime limit of $10,000)
• For the payment of qualified higher education expenses
• To an alternate payee pursuant to a divorce decree or separation agreement
• For the payment of medical expenses in excess of 7.5% of AGI
• For payment of health insurance premiums during certain times of unemployment
• As a series of substantially equal payments
• As a result of disability or death of the IRA participant

What are the consequences of a withdrawl from a Roth IRA?

Distributions of conversion amounts made prior to five years are subject to penalty. The earnings portion of nonqualified distributions are taxable as ordinary income and subject to penalty unless made for death or disability, first-time home purchase ($10,000 lifetime maximum), medical expenses in excess of 7.5% of AGI, certain educational expenses, or as part of a series of substantially equal payments based on owner’s life expectancy.

Should I convert my current IRA into a Roth IRA?

If you can pay the taxes due on the distribution from sources outside your IRA, you will likely be better off with a Roth. If you are young and in a lower tax bracket, the implications of tapping your account to pay the tax bill will be offset by years of tax-free earnings and, ultimately, tax-free withdrawals. However, if you anticipate being in a much lower tax bracket in the future, it may not be advantageous to pay tax on your existing IRA today. Consult your financial advisor to help you assess the pros and cons of the alternatives.

Highlights of the Roth IRA

• Contributions are not tax-deductible when made. Distributions are free from federal income tax if taken after age 59½ or as a result of death or disability as long as an investment has been made in the account for at least five years.
• Early withdrawals are free from both income tax and penalty if used for a first-time home purchase ($10,000 lifetime limit) and the account has been in place for at least five years.
• There are no age limits. Individuals with earned income can make contributions after age 70½.
• There are no required minimum distributions during the IRA owner’s lifetime.

Highlights of the traditional IRA

• Individuals not covered by an employer’s retirement plan can make a fully deductible $5,000 ($6,000 for those age 50 and older) contribution even if their spouses are covered by an employer’s plan, as long as their AGIs are $173,000 or less. (There is no income limit if neither is covered by an employer’s plan.)
• The income limits for IRA deductibility are gradually increased for those married taxpayers participating in their employers’ retirement plans.

Comparison Chart

Traditional IRA	Roth IRA
Annual contribution limit	For 2012, $5,000 ($6,000 for those 50 and older) either deductible or nondeductible (in combination with Roth IRA)	For 2012, $5,000 ($6,000 for those 50 and older) in combination with traditional IRA
Eligibility	Available to anyone who has earned income and is under age 70½.	Available to anyone with earned income; single filers with AGIs of $110,000 or less; joint filers with AGIs of $173,000 or less.
Deductibility	Full deduction allowed if individual is not an “active participant” in an employer sponsored retirement plan. Deductibility for active participants is determined by AGI. Noncovered spouse of active participant can deduct contribution up to $5,000 ($6,000 for those 50 and older) for 2012 subject to AGI limit ($173,000 for joint filers).	Always nondeductible
Tax on distributions	Distributions and earnings from a deductible IRA are taxed as ordinary income. Distributions of nondeductible contributions are considered a nontaxable return of capital.	Qualified distributions, distributions of contribution amounts and distributions of conversion amounts are tax-free. The earnings portions of nonqualified distributions are subject to income tax.
Tax or penalty on premature distributions	Ordinary income tax on entire distribution; 10% penalty on distributions prior to age 59½ unless made for death or disability, first-time home purchase ($10,000 lifetime maximum), medical expenses in excess of 7.5% of AGI, certain educational expenses, to an alternate payee pursuant to a divorce decree or separation agreement, for payment of health insurance premiums during certain times of unemployment, or as part of a series of substantially equal payments based on the owner’s life expectancy.	Distributions of conversion amounts made prior to five years are subject to penalty. The earnings portion of nonqualified distributions are taxable as ordinary income and subject to penalty unless made for death or disability, first-time home purchase ($10,000 lifetime maximum), medical expenses in excess of 7.5% of AGI, certain educational expenses or as part of a series of substantially equal payments based on owner’s life expectancy.
Required minimum distributions	Must begin by April 1 of the year following the year age 70½ is attained	Only applies to beneficiaries upon death of IRA owner