IRA Common Terms
Adjusted gross income, or AGI – Used to Calculate federal income tax, your AGI includes all the income you received over the course of the year, such as wages, interest, dividends and capital gains, minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses, interest penalty on early withdrawal of bank CD certificates, and payments made to retirement plans such as SEP and SIMPLE IRAs.
Contribution – An individual may have and may contribute to more than one Traditional or Roth IRA in any given year, but the total contributions for the taxable year cannot exceed the lesser of the maximum contribution limit or 100 percent of earned income.
As dictated by law changes under EGTRRA, the maximum contribution limit per individual for a Traditional and/or Roth IRA for taxable years 2005-2007 is the lesser of $4,000 (plus catch-up contributions, if eligible) or 100 percent of earned income. EGTRRA defines the regular contribution limits through taxable year 2008 as shown in the following table. EGTRRA also allows potential cost-of-living adjustment (COLA) increases in increments of $500 to begin in 2009
Year Amount
2005-2007 $4,000
2008 $5,000
2009 and beyond $5,000 plus potential COLA increases
EGTRRA provisions allow eligible individuals who are age 50 and older to take advantage of catch-up contributions up to $1,000 to their traditional and Roth IRAs (IRC Sec. 219(b)(5)(B)).
Deductible/nondeductible – Contributions to a traditional IRA are tax-deductible if you are not covered by your employer’s retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible.
Individual retirement account, or IRA – IRAs are retirement accounts with tax advantages. But your contributions can’t exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59 and a half. Take money out before then and you will usually get hit with a 10-percent penalty unless you meet certain specified requirements.
Modified adjusted gross income, or MAGI – For the purpose of determining your contribution limit, some people use their MAGI. For most people, this will be the line on your taxes that says ‘adjusted gross income’, but for some people it has to be modified. Some modifiers include: foreign-earned income, housing costs of U.S. citizens or residents living abroad and income from sources within Puerto Rico, Guam or American Samoa.
Required minimum distribution – Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70 and a half. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren’t subject to minimum distribution requirements until after the Roth owner dies.
Rollover – This is the term used when transferring assets from one tax-deferred retirement plan to another.
Roth IRA – The most notable thing about a Roth is withdrawals are tax-free if the account has been open for at least five years and you are at least 59 and a half when you start to withdraw money. Contributions to a Roth are not tax-deductible. You can withdraw your contributions anytime you want, no penalty or taxes. You can also withdraw earning for a qualifying event if the account is at least 5 years old. Qualifying events include: death or disability of the account holder and a first-home purchase.
Tax and penalty-free withdrawals – You can take money out of your IRA tax-free and penalty-free as long as you repay the full amount within 60 days, but may only do it once in a 12-month period. The withdrawal provision was intended to make IRAs portable. It’s not for short-term loans. But some account holders use the rule to make loans to themselves.
Information above is provided as guidelines only and are not recommendations nor advice from Brazos Valley Bank. If you have questions regarding financial planning we suggest you speak to a professional accountant or financial advisor; if you do not have one, we will be more than happy to suggest one for you.
IRA Common Terms
Adjusted gross income, or AGI – Used to Calculate federal income tax, your AGI includes all the income you received over the course of the year, such as wages, interest, dividends and capital gains, minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses, interest penalty on early withdrawal of bank CD certificates, and payments made to retirement plans such as SEP and SIMPLE IRAs.
Contribution – An individual may have and may contribute to more than one Traditional or Roth IRA in any given year, but the total contributions for the taxable year cannot exceed the lesser of the maximum contribution limit or 100 percent of earned income.
As dictated by law changes under EGTRRA, the maximum contribution limit per individual for a Traditional and/or Roth IRA for taxable years 2005-2007 is the lesser of $4,000 (plus catch-up contributions, if eligible) or 100 percent of earned income. EGTRRA defines the regular contribution limits through taxable year 2008 as shown in the following table. EGTRRA also allows potential cost-of-living adjustment (COLA) increases in increments of $500 to begin in 2009
Year Amount
2005-2007 $4,000
2008 $5,000
2009 and beyond $5,000 plus potential COLA increases
EGTRRA provisions allow eligible individuals who are age 50 and older to take advantage of catch-up contributions up to $1,000 to their traditional and Roth IRAs (IRC Sec. 219(b)(5)(B)).
Deductible/nondeductible – Contributions to a traditional IRA are tax-deductible if you are not covered by your employer’s retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible.
Individual retirement account, or IRA – IRAs are retirement accounts with tax advantages. But your contributions can’t exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59 and a half. Take money out before then and you will usually get hit with a 10-percent penalty unless you meet certain specified requirements.
Modified adjusted gross income, or MAGI – For the purpose of determining your contribution limit, some people use their MAGI. For most people, this will be the line on your taxes that says ‘adjusted gross income’, but for some people it has to be modified. Some modifiers include: foreign-earned income, housing costs of U.S. citizens or residents living abroad and income from sources within Puerto Rico, Guam or American Samoa.
Required minimum distribution – Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70 and a half. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren’t subject to minimum distribution requirements until after the Roth owner dies.
Rollover – This is the term used when transferring assets from one tax-deferred retirement plan to another.
Roth IRA – The most notable thing about a Roth is withdrawals are tax-free if the account has been open for at least five years and you are at least 59 and a half when you start to withdraw money. Contributions to a Roth are not tax-deductible. You can withdraw your contributions anytime you want, no penalty or taxes. You can also withdraw earning for a qualifying event if the account is at least 5 years old. Qualifying events include: death or disability of the account holder and a first-home purchase.
Tax and penalty-free withdrawals – You can take money out of your IRA tax-free and penalty-free as long as you repay the full amount within 60 days, but may only do it once in a 12-month period. The withdrawal provision was intended to make IRAs portable. It’s not for short-term loans. But some account holders use the rule to make loans to themselves.
Information above is provided as guidelines only and are not recommendations nor advice from Brazos Valley Bank. If you have questions regarding financial planning we suggest you speak to a professional accountant or financial advisor; if you do not have one, we will be more than happy to suggest one for you.