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1 P l a n n i n g Y o u r R e t i r e m e n t Q & A s about IRAs Your promotional imprint here and/or back cover. ABC Company 123 Main Street Anywhere, USA

2 The key word in the phrase Individual Retirement Account is individual. And in order for your retirement to live up to your financial expectations, you can rely on only one individual: you. Today, you won t find many employers who will completely fund your retirement. And, most likely, you won t spend your entire career working for just one company. That s why an IRA is so important. With an IRA, you can make tax-favored contributions for yourself from the first year you begin working until the last. And, during both your working years and your retirement, you can manage your IRA assets according to your personal needs and circumstances. In this brochure, we ll answer some of the questions that come up most often concerning IRAs. Q. What is an Individual Retirement Account and how does it work? A. An IRA gives you the chance to set up a tax-favored retirement account for yourself and for your beneficiaries. Typically, your IRA is created as a trust or a custodial account with a bank acting as your trustee or custodian. Each year, you can make IRA contributions, which are held and invested for your benefit until you are ready to receive them in retirement.

3 Q. How do I qualify to open an Individual Retirement Account? A. All you have to do is earn compensation. This compensation can be in the form of wages, salary, sales commissions, tips, professional fees, bonuses, or other amounts in return for personal services. (All taxable alimony and separate maintenance payments received by an individual under a decree of divorce or separate maintenance are treated as compensation for IRA purposes.) You can also set up an IRA if you work for yourself and have income from either a sole proprietorship or a partnership (assuming you are an active partner who provides services to the partnership). Q. Are there different types of IRAs? A. Yes. There are two types: the traditional IRA and the Roth IRA. Q. What is the major tax advantage of the traditional IRA? A. Contributions to a traditional IRA may be tax deductible from your gross income. That means you can claim the deduction even if you don t itemize deductions on your tax return. Tax-deductibility allows your retirement savings to accumulate without reduction for taxes. This can mean more money for you at retirement, even though ordinary income taxes would be payable on your contributions and any IRA investment earnings at the time of withdrawal. But keep in mind that your IRA contribution deduction may be limited or may not be available at all. Q. What are the limits? Tax-deductible IRA vs. Fully Taxable Investment Account Assume: Tax bracket is 33% (other tax rates may apply to you). Annual IRA contribution is $5,000 (contribution limit for 2008). Annual taxable account contribution is $3,350 ($5,000-33% tax). Average annual investment return is 8% for both accounts (33% tax is subtracted each year from the taxable account s earnings). 10 Years 20 Years 30 Years Deductible $72,433 $228,810 $566,416 IRA* Taxable $42,851 $115,080 $236,832 Account * The IRA balance will be taxed on distribution; distributions from the taxable account will not be taxed at that time. Source: NPI A. For your contributions to be at least partly deductible, you must meet one of the following conditions: Neither you nor your spouse is an active participant in an employersponsored retirement plan. You (and/or your spouse) actively participate in an employer s plan, but

4 your adjusted gross income (AGI) is under a certain amount. If you are a plan participant and your AGI for a year exceeds a threshold amount, the amount of your maximum deductible IRA contribution for that year is phased out. IRA Deduction Phaseout Ranges for Plan Participants Year Joint Return Single, Head of Household 2008* $85,000-$105,000 $53,000-$63,000 * To be inflation-adjusted for later years. The IRA deduction of a married-separate filer is phased out with between $0 and $10,000 of AGI. Suppose, for example, you are single and have AGI of $75,000 in If you do not participate in a plan at work, you may make fully deductible IRA contributions, no matter how much you earn. On the other hand, if you are a plan participant, you will not be allowed to claim any IRA contribution deduction, since your AGI exceeds the $63,000 full phaseout amount applicable in that year. For joint filers, only the participantspouse is subject to the above AGI limits. If you are not a participant, but your spouse does participate in an employersponsored plan, you may make a deductible IRA contribution if your 2008 joint AGI is $159,000 or less. The amount deductible is phased out with joint AGI over $159,000, with full phaseout at $169,000. (The IRS will increase these income ranges for annual inflation.) For example, suppose you are married and your spouse is a participant in a plan at work, but you are not. Your joint AGI is $140,000 in Your spouse would be ineligible to make a deductible contribution due to the AGI limitation applicable to plan participants (see table). But you may make a fully deductible contribution, since your joint AGI does not exceed the $159,000 AGI threshold applicable to nonparticipant-spouses of participants. To the extent you cannot make deductible contributions to a traditional IRA, you may make nondeductible contributions. When you make withdrawals from a nondeductible IRA, only your investment earnings are taxable. Your nondeductible contributions are returned to you tax free. Q. What is a Roth IRA and how is it different from the traditional IRA? A. The Roth IRA allows only nondeductible contributions. But, if you satisfy the law s requirements, withdrawals from a Roth IRA are completely tax free.

5 To gain this special tax treatment, no distributions may be made within the five-taxable-year period beginning with the first taxable year for which a contribution was made. Thereafter, earnings can be distributed from the Roth IRA tax free: On or after the individual attains age 59½; To a beneficiary (or the estate of the individual) after the death of the individual; If the individual is disabled; or For qualified first-time homebuying expenses. Qualified first-time homebuying expenses include the payment of up to a lifetime limit of $10,000 in acquisition costs for a principal residence of a firsttime homebuyer who is the taxpayer, the taxpayer s spouse, or any child, grandchild, or ancestor of the taxpayer or the taxpayer s spouse. A first-time homebuyer is not necessarily a person buying a home for the first time. The term includes a person who has not owned a principal residence during the two years before the date a contract of sale is signed or the date construction begins. Q. Do eligibility limits apply to Roth IRAs? A. Yes. For higher income individuals, the ability to contribute to a Roth IRA is subject to a phaseout. For 2008, the phaseout range for joint filers begins with AGI over $159,000 and extends to $169,000. For others (except married-separate filers) the range starts once AGI exceeds $101,000, with full phaseout at $116,000. On the plus side: Unlike with a traditional IRA, contributions to a Roth IRA may be made even after the individual for whom the account is maintained has reached age 70½. And the tax law s minimum distribution rules that apply to IRA owners over age 70½ aren t applicable to Roth IRAs during the owner s lifetime. Q. What if I already have a traditional IRA? May I switch it over to a Roth IRA? A. Taxpayers may roll over amounts from existing deductible or nondeductible IRAs to a Roth IRA. However, any taxable amounts that are rolled over from a current IRA must be included in income. All taxable amounts are includable in the tax year in which the rollover occurs. The rule allowing a rollover does not apply if the taxpayer s AGI exceeds $100,000 (not including the conversion amount or any required minimum distributions from

6 an IRA) or the taxpayer is a married individual filing a separate return. Starting in 2010, these restrictions will no longer apply. Whether you should convert an existing IRA to a Roth IRA depends on your personal situation, including your current and future tax rates, when you will need your retirement money, and your expected investment return. Our professionals can help you decide what is best for you. Q. How much can I contribute to a traditional IRA or Roth IRA each year? A. The annual contribution limit for IRAs in 2008 is $5,000. After 2008, the limit will be adjusted for inflation. Each working individual can contribute up to the annual limit or 100% of his or her compensation, whichever is less. Married couples can contribute twice as much $10,000 in 2008, for example even if one spouse doesn t earn compensation. Note that the limit caps your annual contributions to all of your IRAs, traditional and Roth, not to each individual account. So, in 2008, you could contribute $2,500 to your traditional IRA and $2,500 to your Roth IRA, for a total contribution of $5,000. If you are age 50 or older, you also may be able to make additional catchup IRA or Roth IRA contributions to make up for possible missed retirement savings opportunities earlier in life. The maximum catch-up amount is $1,000. Thus, in 2008, you might be able to contribute as much as $6,000 to your IRAs and your spouse another $6,000 to his or her IRAs, if you are both age 50 or older. IRA Contribution Limits Maximum Contribution Year Without Catch-up With Catch-up 2008 and after $5,000* $6,000 * Will be adjusted for inflation in $500 increments Contributions Traditional Deductible Deductible Traditional Nondeductible Nondeductible Roth IRA Nondeductible Comparison of IRAs Earnings Tax deferred Tax deferred Nontaxable Q. How will my IRA money be invested? Distributions Fully Taxed Earnings Taxed Tax free A. The answer to that question depends on your investment objectives and philosophy, the size of your IRA, and your personal needs and goals. Before we recommend any IRA investment, we will discuss these matters in detail with you. Our willingness to devise an investment plan that meets your needs is one of

7 the special pluses of establishing an IRA with us. Q. Are there any other advantages in setting up an IRA with you? A. Yes. Our IRAs are easy to implement and easy to maintain. Because our IRA documents have been approved by the IRS, all we require is your signature on a form or two. Once you contribute to your IRA, we provide you with periodic statements concerning your account, and we file all necessary forms with the IRS. All you have to do is include certain information concerning your IRA on your tax return. In addition, we offer you the security of knowing that your IRA fund is in the hands of professionals with years of experience. And we are on the job fulltime ready and willing to answer questions or discuss your IRA with you at any time. Q. Can I take money out of my traditional or Roth IRA before I retire? A. Yes. Actually, you can take money out of your IRA at any time. However, if you withdraw funds from your IRA before age 59½, you may be subject to a 10% penalty tax in addition to any ordinary income tax that is otherwise payable. The purpose of this penalty is to discourage you from taking your IRA money before retirement. Certain exceptions such as distributions made in the event of a disability or death, for certain medical expenses, for first-time homebuying or higher education expenses, to pay certain medical insurance premiums, or distributions in the form of a life annuity apply. Q. Can I leave my traditional IRA assets in my IRA for as long as I want? A. No. As mentioned earlier, you must begin taking minimum distributions from a traditional IRA by April 1 of the year following the year in which you reach age 70½. If you fail to take the appropriate minimum distributions, you will face a 50% excise tax on any amount you should have withdrawn but did not. The lifetime minimum distribution rules do not apply to Roth IRA owners. Q. If I die before I receive all of my IRA money, what happens to the remainder? A. When you open your traditional or Roth IRA, you must designate a beneficiary for your account. Any funds remaining in your IRA when you die generally will be distributed to this beneficiary.

8 nconclusionn Traditional and Roth IRAs provide you with savings alternatives that offer both tax and non-tax advantages. IRAs can be an important element of your strategy for meeting your personal financial goals. If we can help you set up an IRA or help you with your retirement planning in other ways please let us know. Copyright 1993, , by NPI 1:2 (3/08)

9 To order this booklet for your clients and prospects, please contact: 15 Corporate Circle Albany, NY Fax Need an order form? Call Newkirk today or download an order form at 1:2

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