IRAs
An Individual Retirement Account (IRA) is an individual savings plan that you establish and to which you contribute. It can be a key component of your financial plan. In order to contribute to an IRA, you must receive earned income at least equal to the amount of the contribution. The contribution limit for 2009 is $5,000 for individuals under age 50, and $6,000 for those 50 and older.  In general an IRA offers two significant advantages – tax-deductible contributions and tax-deferred earnings/growth. Eligibility to deduct an IRA contribution may be modified by one’s participation in an employer-sponsored (qualified) retirement plan, marital status, and adjusted gross income (AGI). Anyone who owns an IRA, however, can enjoy the advantages of tax-deferral. Deductible IRA assets and their earnings are not recognized as ordinary income until they are distributed to the account holder.

Roth IRA
In 1998 Congress created the Roth IRA. This investment vehicle represents an opportunity to create tax-free income without having to invest in municipal bonds. The minimum earned income requirements and contribution limits are the same as for a traditional IRA (see above). However, contribution eligibility “phases out” based upon very specific AGI ranges related to marital status. Participation in an employer-sponsored qualified plan is irrelevant, and contributions are not deductible.

Direct Rollover IRAs
If you leave or retire from a company that sponsors a qualified plan, you may continue to defer income taxes by executing what is known as a direct rollover to an IRA. In general, any distribution from a qualified employer-sponsored retirement plan is subject to an immediate 20% income tax withholding requirement, and the assets are subject to income tax on your next return. However, if you execute a direct rollover to an IRA, there is no withholding and the IRA assets (along with earnings and growth) continue to be sheltered from recognition as ordinary (taxable) income until they are distributed.

Getting Started
Prior to the year in which one reaches age 70½, any individual who receives earned income may contribute to an IRA. As noted above the contribution limit for 2009 is $5,000 for individuals under age 50, and $6,000 for those 50 and older. The contribution must be made no later than April 15 of the next year. That is, one may make a 2009 contribution on or after January 1, 2009, but no later than April 15, 2010.

Withdrawing from your IRA
You may begin withdrawing funds from an IRA without penalty anytime after reaching age 59½. (Withdrawals made prior to age 59 1/2 may be subject to ordinary income tax and 10% tax penalty.) You must calculate your Required Minimum Distribution (RMD) in the year in which you reach age 70½ and each year thereafter. The calculation is based on the account value and factors found in the IRS' "Uniform Lifetime" or "Joint and Last Survivor" expectancy table. Only the initial RMD may be postponed until April 1 of the next calendar year. All other RMD's must be distributed in the calendar year for which they are determined. Failure to meet the minimum distribution requirement will result in a 50% penalty in addition to any ordinary income tax liability.

At your death the assets in your IRA will pass to your named beneficiary or beneficiaries. A spousal beneficiary may keep the inherited IRA in the name of the deceased spouse or may choose to roll the assets over into his or her own IRA. In addition, as a result of the Pension Protection Act of 2006, beginning January 1, 2007, non-spousal beneficiaries may also rollover to an inherited IRA.

Please contact your financial advisor for more information about your personal retirement needs and the services we can provide to assist businesses with creating and maintaining retirement plans.

Any comments regarding tax implications are informational only; Scott & Stringfellow does not provide tax or legal advice. As always, you should consult your tax or legal advisor.