Know your IRA options

Transcription

1 The right choice for the long term Know your IRA options Traditional IRA or Roth IRA? It s your choice. There s an IRA for everyone. This brochure will help you determine which one may be right for you.

2 What will your retirement look like? Will you be traveling, enjoying quality time with family, volunteering for a favorite cause or maybe pursuing a second career? Regardless of what you d like to be doing in retirement, investing in an individual retirement account (IRA) can help you move closer to your goals. Let s get started There are two types of IRAs to consider: traditional and Roth. In three easy steps you ll be able to evaluate which IRA may be best for you. Step 1: Determine your IRA eligibility Step 2: Compare your IRA options Step 3: Review your financial circumstances This material was not written for and is not intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax law. Each taxpayer should seek advice from an independent tax adviser based on the taxpayer s particular circumstances. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

3 Step 1 Determine your IRA eligibility Traditional or Roth? Or both? An IRA gives you the opportunity to save for retirement and receive special tax privileges. There are two types of IRAs traditional and Roth each with its own rules and benefits. The first step in choosing the one that s right for you is knowing which one(s) you re eligible to contribute to. Anyone who earns income through employment can open a traditional IRA. Whether you qualify for a Roth IRA or can deduct contributions to a traditional IRA will depend on your tax-filing status and your modified adjusted gross income (MAGI). Traditional IRA 2011 tax deductibility The table on the left shows whether you qualify for a tax deduction should you choose to contribute to a traditional IRA. The table on the right shows how much you can contribute to a Roth IRA, if you re eligible, depending on your income. Contributions to a Roth IRA aren t tax-deductible. Both tables take into account your spouse s income, if applicable. Roth IRA 2011 contribution eligibility Tax-filing status/magi Your deductibility status Tax-filing status/magi How much you can contribute Filing single you are covered by a retirement plan at work $56,000 or less Fully deductible $56,001 $65,999 Partially deductible $66,000 or more Nondeductible Filing single you are not covered by a plan at work Filing single $107,000 or less Full contribution amount $107,001 $121,999 Partial contribution amount $122,000 or more Not eligible Filing jointly All MAGI amounts Fully deductible $169,000 or less Full contribution amount Filing jointly you are covered by a plan at work $90,000 or less Fully deductible $90,001 $109,999 Partially deductible $110,000 or more Nondeductible Filing jointly only your spouse is covered by a plan at work $169,000 or less Fully deductible $169,001 $178,999 Partially deductible $179,000 or more Nondeductible Your MAGI is calculated by subtracting any unreimbursed business expenses and allowable adjustments (such as deductible IRA contributions or alimony payments) from your gross income. To determine your MAGI, find your adjusted gross income (AGI) from your last tax return and ask your tax adviser how it may be changed or modified by certain losses or deductions. $169,001 $178,999 Partial contribution amount $179,000 or more Not eligible Eligible for both? You can contribute to both a traditional and a Roth IRA as long as the combined amount does not exceed the applicable annual contribution limits shown on page 2. Married and filing separately? If so and your MAGI is less than $10,000, you can make a partially deductible contribution to a traditional IRA (if you and/or your spouse are covered by a retirement plan) or a partial contribution to a Roth IRA (regardless of whether you re covered by a plan). Married and not covered by a plan? If neither you nor your spouse participates in a retirement plan at work, you can make a fully deductible contribution to a traditional IRA regardless of your filing status or income. Visit and see IRS Publication 590 for more information. 1

4 Step 2 Compare your IRA options Take the next step Once you know which IRA(s) you re eligible to open, consider which one(s) may be the best for you. The table on page 3 can help you evaluate your choices. Shown below is the maximum amount you can invest in IRAs each year, depending on your age. Know your limits* Year If you re younger than 50 If you re 50 or older 2010 $5,000 $6, $5,000 $6,000 * Future contribution limits may be adjusted for cost-of-living increases. Contributions for the current tax year must be made by April 15 of the following year, unless April 15 falls on a Saturday or Sunday. I chose a Roth IRA Age: 38 Filing status: Single Modified adjusted gross income: $35,000 Although I could take a tax deduction for a traditional IRA, I m going with a Roth because I like the idea of taking tax-free distributions when I reach age 59½. Who knows how high federal income taxes will be by the time I retire? I chose a traditional IRA Age: 45 Filing status: Married Modified adjusted gross income: $50,000 I picked a traditional IRA, while my husband went with a Roth. This gives us the best of both worlds. My traditional IRA allows us to deduct the entire contribution on our tax return a definite advantage. 2

5 Which is right for you? Here s a side-by-side comparison of each IRA option and various factors you should keep in mind. Tax deductibility Tax-deferred/tax-free growth Withdrawals Age limit for contributions Required minimum distributions (RMDs) Taxability of retirement plan rollovers Traditional IRA You may qualify for a tax deduction (credit) on your contributions if your household income doesn t exceed certain limits. (Please see table on page 1.) The maximum credit is 50% of your annual contribution, not to exceed $2,000. Your earnings grow tax-deferred until withdrawn. Withdrawals are taxable, and those made before you reach age 59½ are subject to a 10% federal tax penalty unless you, as the IRA owner, qualify for one of the following exceptions: You re disabled You take withdrawals as substantially equal periodic payments The withdrawal is for payment of certain unreimbursed medical bills The withdrawal is for payment of health insurance premiums during a period of unemployment lasting at least 12 weeks The withdrawal is for payment of qualified education expenses The withdrawal is for the purchase of a first home (up to $10,000 lifetime maximum) Withdrawals made by beneficiaries (after your death) are not subject to a 10% tax penalty. You may contribute to a traditional IRA if you re younger than age 70. You must begin taking RMDs no later than April 1 of the year following the year in which you reach age 70½. You may roll any non-roth portion of your retirement plan account into a traditional IRA without tax consequences. Roth IRA Contributions are made with after-tax money and aren t tax-deductible. Your earnings grow tax-free if certain conditions are met (see below). Withdrawals of contributions can be made at any time without taxes or penalty. The withdrawal of earnings is always penalty-free and may also be tax-free if it has been at least five years since the initial contribution to the account and you, as the IRA owner, meet one of the following exceptions: You re age 59½ or older You re disabled You re purchasing a first home (up to $10,000 lifetime maximum) Withdrawals made by beneficiaries (after your death and the five-year investment period) are not subject to taxes or a 10% federal tax penalty. As long as your income meets the eligibility requirements, contributions may be made to a Roth IRA at any age. You, as the IRA owner, are not required to take minimum distributions during your lifetime. Your beneficiaries, however, must begin taking minimum distributions immediately after your death. If you roll the non-roth portion of your retirement plan account into a Roth IRA, it s a taxable event, but the amount is not subject to a 10% early withdrawal penalty. 3

6 Step 3 Review your financial circumstances Are you on track? Investing in an IRA can help you move toward your retirement goals. To help you stay on track, we encourage you to: Review your quarterly statements. Check in with your financial adviser once a year. Discuss with your financial adviser whether you re still eligible to contribute to the IRA(s) you invest in. (For example, you can no longer make contributions to a traditional IRA after reaching age 70, or your household income may eventually preclude you from making contributions directly to a Roth IRA see the conversion information on the next page.) About to change jobs or retire? If so, and you ve been participating in your employer s retirement plan, you ll need to decide what you d like to do with the money in your account. Contact your financial adviser to learn about your options, one of which is rolling your assets into an IRA. Ready to withdraw your money? At this critical point, before you make a move, ask your financial adviser about the best strategy for taking money out of your IRA. He or she can help you minimize any taxes or penalties you may owe. In addition, you should always consult your personal tax adviser before making any tax-related decisions. Are you turning 70½? You probably don t celebrate half birthdays, but reaching the age of 70½ is a milestone, according to the IRS. During that year, you must begin taking money from your tax-deferred retirement plan accounts and traditional IRAs. Your required minimum distribution, or RMD, is calculated according to IRS guidelines. Contact your financial adviser for help calculating your RMDs. Is your beneficiary up-to-date? It s a common mistake investors forget to name a beneficiary or update an old beneficiary designation. But should an unexpected tragedy occur, who will inherit your IRA account? You can determine how your IRA will be passed on by naming a beneficiary. (In the event you fail to name one, the IRA agreement that s part of your application explains how your account will be distributed.) Be sure to complete the IRA Beneficiary Change Form to ensure your account is passed on as you wish. For more information about investing in an IRA, contact your financial adviser or visit americanfunds.com, go to the Retirement Planning tab and click on IRAs. (Or, go directly to americanfunds.com/ira.) 4

7 Converting a traditional IRA to a Roth IRA If you have a traditional IRA, you may convert it to a Roth IRA regardless of your income or tax-filing status. The benefits of a Roth IRA include: Tax-free withdrawals Distributions are tax-free if you take them at least five years after your initial contribution or latest conversion and you are at least age 59½ or disabled or use the money for a first-home purchase ($10,000 lifetime limit). Also, when you pass away, your beneficiaries can generally take tax-free withdrawals. Tax diversification If you have both tax-free accounts (such as a Roth IRA) and tax-deferred accounts (such as a 401(k) plan or a traditional IRA), you ll have the income flexibility you may need during retirement as your tax rate rises or falls. No required minimum distributions (RMDs) RMDs are not required during your lifetime, as the Roth IRA owner. Estate planning After your death, your beneficiaries must begin taking RMDs, but will receive the money income-tax-free. Conversions are taxable events If you convert to a Roth IRA, you ll likely have to pay income taxes on some or all of the IRA amount contributions and earnings in the traditional IRA that haven t yet been taxed. Talk with the professionals IRA conversion rules and tax calculations can be complicated, and state income-tax rules for conversions may differ from federal rules. Because a misstep could result in unforeseen income taxes or penalties, we encourage you to discuss conversion options with your tax consultant and financial adviser. You can change your mind If you convert to a Roth IRA and then change your mind for any reason (for example, if the account value declines), you can convert back to a traditional IRA. The only catch: this reversal, known as a recharacterization, must be completed before the tax-filing deadline with respect to the year that the conversion was implemented. A Roth conversion may be worth considering if you: Can leave the money in the account for at least five years after your first contribution and until you reach age 59½ Expect tax rates to rise in the future and, as a result, would rather pay taxes now Can pay the resulting income taxes from a source other than the IRA so that the full amount of the traditional IRA goes into the Roth IRA for a greater opportunity to grow until it s withdrawn. I decided to convert to a Roth IRA Age: 52 Filing status: Single Modified adjusted gross income: $125,000 I make too much money to contribute directly to a Roth, so I m taking advantage of the ability to convert my traditional IRA. I m OK with paying taxes now, because I ll be able to enjoy tax-free distributions when I retire in about 15 years. 5

8 The right choice for the long term Why choose an IRA that s invested in the American Funds? Paying for retirement will most likely be the biggest expense you ll ever have. And it s the one time you can t afford to end up short of money. American Funds understands this. That s why we encourage you to consult with an experienced financial adviser so you can be sure you re investing your money wisely. The multiple portfolio counselor system American Funds unique approach to portfolio management, developed more than 50 years ago, blends teamwork with individual accountability and has provided us with a sustainable method of achieving fund objectives. For nearly 80 years, American Funds has invested with a long-term perspective and attention to risk an investment strategy that has helped us earn our shareholders trust. Here are the five factors behind our investment approach: A long-term, value-oriented approach American Funds seeks to buy securities at reasonable prices relative to their prospects and hold them for the long term. An extensive global research effort American Funds investment professionals travel the world to find the best investment opportunities and gain a comprehensive understanding of companies and markets. Experienced investment professionals American Funds portfolio counselors have an average of 26 years of investment experience, providing a depth of knowledge and broad perspective that few organizations have. A commitment to low management fees The American Funds provide exceptional value for shareholders, with management fees that are among the lowest in the mutual fund industry. Ask your financial adviser how each of these factors benefits you as an American Funds shareholder. You can also learn more about the American Funds at americanfunds.com. You should carefully consider the objectives, risks, charges and expenses of the American Funds and, if applicable, any other investments in your IRA. This and other important information is contained in the funds prospectuses and summary prospectuses, which are available from a financial professional and on the Web. Please read the prospectuses carefully before investing. Tax issues involving IRAs can be complex. Please consult with your tax or legal adviser before making any decisions. Lit. No. IRGEBR P Litho in USA CGD/8155/S American Funds Distributors, Inc. The Capital Group Companies American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust