• Traditional IRA
• Roth IRA
• Coverdell Education Savings Account
• New IRA Contribution Limits

When can I start taking tax-free distributions form my Roth IRA?
You can withdraw most contributions without paying income tax at any time. Distributions are treated as first being attributable to your contributions until all of your contributions have been distributed.

There are two requirements to qualify for tax-free withdrawals of the income your Roth IRA has earned. First, your Roth IRA must meet the "five-year test". In other words, it must be five years after the first year for which Roth contributions were made. Second, one of the following conditions must apply:
a) You are over age 59 ½
b) Funds are going to your beneficiary upon your death
c) You have become disabled
d) You are using the funds for a first-time home purchase (lifetime limit $10,000 per person)

What if I make an early withdrawal from my Roth IRA and I am not age 59 ½ or covered by any exceptions?
Good news. If you make early withdrawals form a Roth IRA to which you have only made regular contributions of up to $4,000 per year, the amounts are considered to come from your already-taxed contributions first, with no additional taxes or penalties due. When you begin to withdraw earnings from the account, this money will be subject to ordinary income taxes, plus an additional 10% early distribution tax.

Do I have to take minimum distributions when I reach age 70 ½?
No. The Roth IRA is more flexible than a traditional IRA because you are not required to start taking minimum distributions when you reach age 70 ½ . If you don't need the cash, you can let your money continue to grow tax-free for as long as you like. However, minimum distributions must be made to your beneficiaries following your death.

Can I convert my existing traditional IRA to a Roth IRA?
Yes. You can convert your traditional IRA to a Roth IRA if your MAGI in the year of the conversion in under $100,000. This limit is the same for both single filers and married couples who file jointly. Married taxpayers who file separately are not eligible for a Roth conversion. Use care and be sure to get all the facts. This is a complicated decision.

Does the IRA conversion contribution ceiling or $100,000 MAGI include the IRA conversion amount?
No, the MAGI is calculated prior to adding the amount of the IRA conversion contribution.

If I convert a traditional IRA to a Roth IRA, do I owe any taxes?
Yes. Upon conversion, you will owe ordinary income taxes on your investment earnings and on deductible contributions you have made to your traditional IRA. This amount is taxable income in the year the money leaves the traditional IRA. Basically, you owe tax on any money that has not been taxed before. But you will have the opportunity to withdraw earnings made after the conversion, free of any taxes.

What about penalties on conversions from traditional IRAs to Roth IRAs?
The 10% early withdrawal penalty is waived on IRA conversions.

Are there different tax rules regarding withdrawals of IRA conversion contributions?
A distribution that is attributable to an IRA conversion contribution is not subject to income tax. If the distribution is made within five years after the conversion, then the 10% early withdrawal tax applies unless there is an exception.

Can I roll over funds from one Roth IRA to another Roth IRA?
Yes. A rollover or transfer from one Roth IRA to another Roth IRA is tax-free and can be made regardless of your MAGI.

If I invest in a Roth or traditional IRA, can I also invest in a Coverdell (Education) IRA?
The Coverdell (Education) IRA lets you set aside $2,000 per year, per child to pay for future qualified higher-education expenses. The money you invest in the Coverdell (Education) IRA does not count against the maximum you can invest in your Roth or traditional IRA. Eligibility to invest in the Coverdell (Education) IRA follows the same income guidelines as a Roth IRA. Similar to the Roth IRA, the money you invest in a Coverdell (Education) IRA is not tax-deductible, but qualified withdrawals to pay for higher-education expensed are tax-free. Money form Coverdell (Education) IRAs can be used not only for tuition, but also for books, supplies, equipment, and possibly room and board. All assets must be distributed before the beneficiary reaches age 30 or rolled over to another Education IRA to benefit another eligible family member.

What should I do if I am eligible for both a Roth IRA and my company retirement plan, but I don't have enough money to contribute the maximum to both?
Experts recommend that you first contribute at least enough o your company plan to take full advantage of any employer match. After getting the full employer match, the best approach varies depending on your circumstances. Consult with a tax professional if you are unsure.

Does it make sense to make an after-tax voluntary contribution to my company retirement plan instead of a Roth contribution?
No, you will have more after-tax dollars in retirement by making a Roth contribution.

Does it make sense to make a nondeductible contribution to a traditional IRA instead of a Roth contribution?
No, you will get a better tax result by making a Roth contribution.

What if I can deduct a contribution to a traditional IRA?
In general, a person who can afford to make the maximum Roth contribution will benefit more from making Roth contributions. This many not be true if you are close to retirement and it appears that your tax bracket will go down substantially after retirement. You should also consider a deductible traditional IRA contribution if losing the deduction would reduce the amount you can contribute. Seek tax advice if you are in doubt.

Can my Roth IRA be inherited?
Yes. Upon your death, the entire proceeds can be passed on tax-free to your beneficiaries, providing your Roth IRA meets the five-year test.

How will I know if I am a good candidate to convert my traditional IRA to a Roth IRA?
The desirability will differ with each individual's financial circumstances. Certainly, you should weigh the potential tax savings during retirement against the cost of your bill for the conversion. Because this decision is a complicated one, you should consult a tax professional. Consider several key questions:

• Is your IRA comprised mostly of already taxed, nondeductible contributions?
• Can you afford to pay the income taxes due on the conversion from funds outside of your IRA funds?
• What tax bracket are you in now, and what tax bracket do you think you will be in when you retire?
• How long is it before you retire?
• Will the taxable income from the conversion bump you into a higher tax bracket?
• How would a conversion affect the taxation of any Social Security retirement benefits you receive?
• Is the Roth IRA useful to you as an estate planning tool?

I know about the federal taxes due on Roth accounts, but what about state taxes?
In many states, treatment of the Roth IRA for state tax purposes is the same as the treatment of the account for federal tax purposes by the IRS. Consult your tax adviser for more information on state taxes for the Roth IRA.

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Coverdell Education Savings Account
Formerly known as: Education IRA

Seeing a child work toward a college degree is every parent's dream. Unfortunately, this dream can be a nightmare in one respect - the frightful cost of that college degree. If you're wondering how you'll pay for your child's education, an Coverdell Education Savings Accounts (ESA) can be a smart way to save. Although contributions to a Coverdell ESA are not tax-deductible, your withdrawals (including earnings) are tax-free if used for tuition, books, and other qualified higher-education expenses.

What is the Coverdell Education Savings Account (ESA)?
The Taxpayer Relief Act of 1997 created the Education IRA, now known as the Coverdell ESA. It's sole purpose is to help you pay for your child's education expenses, such as tuition, fees, books, supplies, equipment, and, in some cases, room and board and computers. These options were improved by the Economic Growth and Tax Relief Reconciliation Act of 2001.

How does the Coverdell ESA work?
Unlike traditional IRA's, your contributions to a Coverdell ESA are never tax-deductible. However, a Coverdell ESA offers you the potential for tax-free withdrawals - including earnings. Here's a look at how your money can grow in a Coverdell ESA: {$2000/year for 16 years with 6% = $48,552)

What is the most I can contribute to a Coverdell ESA?
The total contributions each year to each child's Coverdell ESA cannot exceed $2,000 for 2002 and later years. If you're eligible, you can contribute the full amount for each child. For example, if you have three children and each has his or her own Coverdell ESA, you can contribute $6,000 ($2,000 to each ESA).

Who is eligible to open and contribute the full amount to a Coverdell ESA?
You can contribute the full amount if you are a:

• Single filer with modified adjusted gross income (MAGI) up to $95,000
• Joint filer with MAGI up to $190,000

What happens if my (our) income is too high to make the full contribution to a Coverdell ESA?
You can make contributions of less than the full amount if you are a :

• Single filer with MAGI between $95,000 and $110,000
• Joint filer with MAGI between $190,000 and $220,000

If your income exceeds these amounts, you cannot make a regular Coverdell ESA contribution for that year.

How long can I contribute to the account?
You can make contributions to a child's Coverdell ESA until he or she reaches the age of 18. This age limit does not apply to special needs beneficiaries. This is a person who requires additional time to complete his or her education because of a physical, mental or emotional condition (including a learning disability).

As a parent, am I the only one who can open and contribute to a Coverdell ESA for my child?
No. Anybody who meets the income requirements can open and contribute to your child's Coverdell ESA. This includes grandparents, aunts and uncles, family friends, and anyone else who wants to pitch in to your child's education fund. Corporations, tax-exempt organizations, and other entities can also make Coverdell ESA contributions, and there are no income limits on these contributors. However, the total contributions to all to all Coverdell ESAs for each child can't exceed $2,000.

Who controls the account?
Every Coverdell ESA must have one, and only one, "responsible individual" to oversee the account. This person decides when funds will be withdrawn and if and when the funds will be rolled over to the Coverdell ESA of a family member. You can be the "responsible individual" as long as you are a parent or legal guardian of the child.

When can I withdraw funds from a Coverdell ESA?
As the responsible individual, you can withdraw funds at any time. However, to avoid tax consequences from the withdrawal, you must use the funds to pay for qualified education expenses for your child (the ESAs designated beneficiary) before he or she reaches age 30 (except that the age 30 limit does not apply to a special needs beneficiary).

What education expenses are considered to be "qualified?"
Qualified expenses include tuition, fees, books and equipment required for enrollment or attendance at nearly any post-secondary educational institution (public, nonprofit or proprietary). Certain room and board expenses also may qualify. Qualified expenses also include these same expenses for elementary and secondary education, and the purchase of computer technology or equipment that is used by the beneficiary and the beneficiary's family while the beneficiary is in school.

What happens if my child doesn't use the fund?
If your child (the designated beneficiary of the ESA) decides not to go to college or leaves school before all the funds are withdrawn, you can roll unused funds into the Coverdell ESA of another child in your family. The beneficiary of the Coverdell ESA that receives the unused funds must be under the age of 30 (except that the age 30 limit does not apply to a special needs beneficiary).

Who is considered a family member for the purpose of a rollover?
Family members of the designated beneficiary who are eligible to receive unused funds include (but are not limited to) spouses, siblings, stepsiblings, nieces, nephews, parents, aunts, uncles, grandparents, children, and grandchildren. Of course, some of these categories will be eliminated immediately since the new designated beneficiary must be under the age of 30 at the time of the rollover (except that the age 30 limit does not apply to a special needs beneficiary).

What if my child earns an academic scholarship and the tuition is waived?
The amount of the scholarship money your child receives is deducted from the allowable expenses for the Coverdell ESA. For example, if qualified expenses total $6,000 and your child receives a scholarship for $3,000, you can make a qualified withdrawal for $3,000 form the Coverdell ESA. Remember that the unused funds can always be rolled over into the Coverdell ESA of a family member.

Can I roll funds from a traditional or Roth IRA into a Coverdell ESA?
No, rollovers from a traditional or Roth IRA into a Coverdell ESA are not allowed.

How does the Coverdell ESA affect other education savings incentives?
Contributions can be made on behalf of the same child to both a Coverdell ESA and a qualified prepaid state tuition program. A person can also receive tax-free distributions from a Coverdell ESA in the same year he or she claims the Lifetime Learning or HOPE Scholarship tax credits, but the same expenses cannot be used for more than one of these tax benefits.

If I contribute to a Coverdell ESA, can I still contribute to a traditional or Roth IRA?
Contributions to traditional or Roth IRAs have no effect on the contribution you can make to each Coverdell ESA.

Don't traditional and Roth IRAs allow me to withdraw funds for education expenses?
Traditional and Roth IRAs do offer penalty-free withdrawals for qualified higher-education expenses, but you may still need to pay taxes on those withdrawals. In contrast, withdrawals from a Coverdell ESA are both tax-free and penalty-free if used for qualified education expenses.

What is the deadline for making a Coverdell ESA contribution?
The deadline for making a Coverdell ESA contribution is the tax return deadline for the year for which the contribution is being made (usually April 15 of the following calendar year), not including extensions.

SFCU - New IRA Contribution Limits
In June 2001, the Economic Growth and Tax Relief Reconciliation Act was signed into law. The new law provides exciting changes to Individual Retirement Accounts (IRA's) in 2002.

One of the most important changes is individuals now have the opportunity to contribute more money to their traditional or Roth IRA. And if you're over 50, you'll have the opportunity to make "catch up" contributions. This will be very helpful for those who realize that they have not saved enough for their retirement.

The new contributions are as follows: