The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed additional incentives for IRA investing. This includes greater contribution limits for the Traditional and Roth IRAs, more flexibility in moving money between IRAs and plans, and the expansion of the Coverdell Education Savings Account (formerly the Education IRA).

Whether you are saving money for a secure retirement or setting aside funds for the education of a child or loved one, the IRA provisions will benefit you. Read through the information below. It will help you decide which type of IRA best enhances your savings and provides for a comfortable retirement.

Expanded Traditional and Roth IRAs

Traditional IRA Highlights

What Is a Roth IRA?

Roth IRA Highlights

Coverdell Education Savings Account

A Quick Guide to IRAs

The Difference Between a Traditional IRA and Roth IRA

Additional Considerations

Is there a Roth IRA Early Withdrawal Penalty?

Compare for Yourself: IRA Calculator

Final Questions

Additional Questions?

Here’s an overview of the changes taking place since the Economic Growth and Tax Relief Reconciliation Act of 2001 was implemented.

Now you can save more in your IRA. For 2002, the standard contribution limit for both Traditional and Roth IRAs was raised to $3,000, with continuing contribution increases in future years. And if you're over 50 you can now make an additional “catch up” contribution of $500 from 2002 to 2005.

Starting in 2002, there is increased “portability” between retirement plans, allowing movement of money between Qualified Retirement Plans and Individual Retirement Accounts. The following retirement plans are affected by the Act:

• Simplified Employee Pension (SEP) Plans

• Salary Reduction SEP (SARSEP) Plans

• Saving Incentive Match Plan for Employees of Small Employer (SIMPLE) Plans

• Section 401(a) plans (including profit sharing, 401(k) and money purchase plans)

• Section 403(b) tax-sheltered annuity plans

• Section 457 plans for state and local governments and tax-exempt organizations

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The basics on Traditional IRAs:

• Can be opened and funded without any employer participation

• Offer immediate tax benefits, with contributions and/or earnings tax-deferred until retirement

• Provide accessibility, with funds always available. Withdrawals made prior to age

59 ½ may be subject to an additional 10% IRS penalty

• Are flexible because there is not a minimum contribution requirement and you can choose your own investments and financial institution

• If you are under age 70 ½

• If you have earned income from employment

• Up to a maximum of $3,000 ($6,000 for couples); individuals age 50 and over can contribute up to a maximum of $3500

Starting in 2002, there is increased “portability” between retirement plans, allowing movement of money between Qualified Retirement Plans and Individual Retirement Accounts.

Money can be moved from an employee’s 457 plan (i.e., PEBSCO) or 403(b) plan into a Traditional IRA

• The individual is not an active participant under an employer's retirement plan

Or if:

• During 2004, the individual earned no more than $65,000 if married and filed jointly, or $45,000 if filing singly. These amounts continue to increase through 2007 and 2005 respectively.

For those who participate in an employer plan, Traditional IRA deductibility is gradually phased out above these income levels.

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The Roth IRA, named after the Senate Finance Committee Chair, William V. Roth, Jr. (R.-Delaware), is much like a Traditional IRA in that you may contribute up to $3,000 per year into the account. The big difference is the tax treatment. Contributions to a Roth IRA are not deductible, but your investment earnings over the years can be tax-free. In other words, when you begin to withdraw your earnings according to the legal guidelines, you will pay no additional tax.

In other words, you get tax-free growth on compounded interest!

The short-term benefits are not as appealing as a Traditional IRA, but the long-term benefits cannot be matched. Those approaching retirement will not be forced to take distributions. Younger investors will find the Roth IRA more liquid and flexible under a variety of qualified purposes.

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The basics on Roth IRAs:

• Allow you to invest after-tax dollars, let the investment grow tax-deferred, and take qualifying withdrawals tax-free

• Have no age limit on making contributions

• At any age

• If you have earned income from employment

• Up to a maximum of $3,000 if individual adjusted modified income is less than $95,000, and $6,000 for couples if their adjusted modified income is less than $150,000

Starting in 2002, there is increased “portability” between retirement plans, allowing movement of money between Qualified Retirement Plans and Individual Retirement Accounts.

Money can be moved from a Traditional IRA to a Roth IRA if you meet the following requirements:

• Your Modified Adjusted Gross Income is $100,000 or less

• If married, you must file a joint income tax return

• Taxes must be paid on all pre-tax dollars you move

• The conversion must be completed in 60 days

Unlike Traditional IRAs, there is no required minimum distribution at age 70 ½ . Your earnings can continue to grow until you need them.

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In prior years, Education Savings Accounts were not very attractive to parents, grandparents, and other parties interested in contributing to a child's education because contributions were limited to $500 and could only be used for higher education. The new tax laws have made significant changes that make them much more attractive.

The Education Savings Account provides tax-free investment growth for children under the age of 30. There is no tax deduction but tax-free growth replaces this benefit.

• Contribution limits increase from $500 to $2,000 per child until age 18

• Education Savings have been expanded to include elementary and secondary school expenses in addition to higher education

• Non individuals, such as corporations, may act as contributors

• Contribution deadline extended from December 31 to April 15 (not including extensions)

• A taxpayer may claim a Hope or Lifetime Learning Credit in addition to tax-free withdrawals from the Education Savings Account

• An individual can contribute to an Education Savings Account and a Qualified State Tuition program (529 plan) in the same tax year

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TRADITIONAL IRA: For individuals under age 70 ½ who have earned income.

ROTH IRA: For individuals of any age with earned income and adjusted gross income below $110,000 (single) or $160,000 (joint). However, the amount you are allowed to contribute each year does decline once you reach adjusted gross income over $95,000 (single) and $150,000 (joint).

TRADITIONAL IRA: A tax-deferred investment with a possible tax deduction if you do not have an employer-sponsored retirement plan or if your income is below certain levels.

ROTH IRA: A tax advantage includes tax-free investment growth if the account has been open for five years or more and meets the qualified distribution rule. There are no tax deductions for contributions, but tax-free growth on compounded interest replaces this benefit.

TRADITIONAL IRA: Income tax is due on all withdrawals, and withdrawals made prior to age 59 1⁄2 may be subject to an additional 10 percent IRS penalty.

ROTH IRA: The investor's contributions to the account may be withdrawn at any time. But to qualify for tax-free withdrawal of investment earnings, the account must be open for at least five years and the account owner must be at least 59 ½ or purchasing a first home. (Under the new laws, even if you've previously owned a home, you may still qualify as a first-time home buyer).

TRADITIONAL IRA: Distributions must start by age 70 ½.

ROTH IRA: There is NO requirement to begin withdrawals at age 70 ½.

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There is no minimum or maximum age requirement for a Roth IRA. Young investors can withdraw their contributions at any time without tax or IRS penalty in case of an emergency. Thus, young investors will be more likely to save. Older investors may make tax-free withdrawals.

Tax-deferred earnings of a Traditional IRA mean faster investment growth for the short term. While tax-free distributions of a Roth IRA mean keeping everything you earn - with the potential for greater earnings long term. Each individual situation is unique and you should consult your financial advisor before deciding if the Roth IRA is right for you.

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Not on your contributions, but any earnings withdrawn before the account has been open for at least five years, and/or are not used for one of the qualified distributions, is subject to tax and a 10% IRS penalty.

Qualified distributions are:

• Distributions made on or after you attain age 59 ½

• Distributions made to a beneficiary

• Distributions made if you become disabled

• Distributions for a qualified first-time home buyer

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Use our Traditional IRA Calculator to determine how contributing to a traditional IRA can help your retirement.

To compare a Roth IRA to an ordinary taxable investment, use our Roth IRA Calculator.

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More questions? Try this Q&A for some quick answers!

A: Coverage you may have with other retirement plans does not affect your eligibility to make a Roth IRA contribution.

A: You are still eligible to make a Roth IRA contribution.

A: Yes, but you must have an adjusted gross income of less than $100,000. You are taxed on the rollover amount of the taxable portion of the Traditional IRA. The funds are not subject to the 10% IRS penalty tax.

A: We recommend you consult with your accountant or financial advisor to determine if a Roth IRA is right for you.

A: There are no special requirements for Roth IRA investments. Your choices range from federally insured Certificates of Deposit to more aggressive non-insured investment products.

A: Yes, the sooner your funds start working for you, the more your Roth IRA will be worth at retirement. Also, the five-year rule for qualified distributions begins when the first Roth IRA is opened.

A: You may move your Roth IRA from somewhere else to this bank. The five years begin when you open your first account. So, if you open it at another institution in 2002 and move it to our bank in the year 2004, we count the date the original account was opened (2002). Thus, you would be eligible for a qualified distribution in the year 2007.

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Customer Service Representatives* can assist you with most IRA questions. Contact us.

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