Traditional IRAs Helping Plan for a Lifetime of Financial Security 6
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Life s Goals The IRA Advantage IRAs, or Individual Retirement Accounts, have long been the investment vehicle of choice for families and individuals who understand the importance of saving for retirement. They are easy to establish and maintain; and nearly anyone who earns an income can contribute on an annual basis. Why Consider a Traditional IRA: n Your entire contribution is income tax-deductible regardless of how much you earn, provided you or your spouse do not actively participate in an employer-sponsored retirement plan. n If you or your spouse contribute to an employer-sponsored retirement plan, the amount of your tax deduction may be reduced or eliminated based on your modified adjusted gross income. n Your money grows income tax-deferred, allowing it to compound more quickly than it could in a taxable savings vehicle. n In most instances, withdrawals of both contributions and earnings are subject to regular income taxes. Traditional IRAs: The Basics Who may contribute to a Traditional IRA? If you are under the age of 70 1 /2 and you earn an income, you may contribute to a Traditional IRA. If you are married, your non-working (non-income producing) spouse may also contribute to his or her own IRA if your income is under a certain limit. A Spousal IRA essentially allows a non-working spouse to set aside money for retirement up to the limits set by the Internal Revenue Code (IRC). How much can I contribute? The maximum amount you can contribute each year to your IRA is $5,000 ($10,000 for a married couple filing jointly). 1 If you are age 50 or older by December 31 of the current tax year, you may also make an additional catch-up contribution of $1,000 to your IRA, bringing your total annual contribution limit to $6,000. This catch-up provision also applies to Spousal IRAs. 2 If you are married and file a joint return, your total IRA contributions must be the lesser of two times the individual contribution amount ($10,000) or 100 percent of your combined incomes. 1 1 The maximum contribution for tax year 2011 is $5,000. The maximum contribution amount increases in $500 increments annually thereafter. 2 The $1,000 catch-up contribution limit does not increase incrementally.
Retirement Planning Retirement Planning Retirement Planning How much of my contribution is income tax-deductible?* As long as you meet certain income and other requirements, all of your contributions to a Traditional IRA will be fully tax-deductible. If you are married and file jointly, your spouse s contributions to his or her IRA will also be fully tax-deductible. If you or your spouse participate in an employersponsored retirement plan, you may still contribute to a Traditional IRA. However, the amount of your contribution that is income tax-deductible may be reduced or even phased out entirely depending on your income. If you are married and file jointly but only one spouse contributes to an employer-sponsored retirement plan, the amount of contribution made by the spouse who does not participate in the employer-sponsored plan may also be reduced or phased out based on your income. If you or your spouse contribute to an employersponsored retirement plan and your income exceeds the limits set by the IRS, you may still make non-deductible contributions to an IRA in order to take advantage of its tax-deferred growth and other features. What happens when I withdraw money from my Traditional IRA?* When you begin withdrawing money from your IRA, you will owe income taxes on all of your earnings and on any tax-deductible contributions you made. You will not owe income taxes on any contributions made with after-tax dollars. Because IRAs are designed to help you accumulate money for retirement, there are specific rules and regulations governing when you can, or must begin making withdrawals. Failure to abide by these rules can result in substantial tax penalties. Generally, you may begin taking penalty-free withdrawals from your IRA when you reach age 59 1 /2. If you withdraw money prior to age 59 1 /2, in addition to any regular income taxes you may owe, you may also be subject to a 10 percent tax penalty. This tax penalty will be waived, however, if you withdraw money prior to age 59 1 /2 for one or more of the following reasons*: n First-time home buyer purchases n Qualified higher education expenses n Payments made to you based on your life expectancy n Health insurance premium payments made while you are unemployed n Medical expenses that exceed 7.5 percent of your adjusted gross income n Disability or death You must begin taking money out of Traditional IRAs, once you reach age 70 1 /2, even if you do not need the income. Such withdrawals are called required minimum distributions (RMDs). You must take your first RMD by April 1 of the year after you reach age 70 1 /2. Thereafter, your RMD must be taken each year by December 31. Failure to take your RMD in any given year will result in a 50 percent excise tax on the amount not taken. Depending upon the size of your IRA, that could add up to a lot of money.** Can I rollover money from other retirement plans into my Traditional IRA?* Yes. Moving money from a qualified retirement plan into a Traditional IRA is called a rollover. You may rollover or transfer money into a Traditional IRA from any of the following qualified retirement plans: n 401(k) n 401(a) n 457(b) govermental n 403(b) n Another Traditional IRA n SEP IRA n SIMPLE IRA after two years of participation n A lump-sum distribution from a qualified pension 2 * Go to www.irs.gov and search Publication 590 for more information.
Life s Goals Filing Status: Income and Deductibility Limits for Traditional IRA Contributions For Individuals Who Contribute to an Employer-Sponsored Retirement Plan Adjusted Gross Income 2011 Single $56,000 or less $56,001 - $65,999 $66,000 and up Married filing jointly $90,000 or less $90,001 - $109,999 $110,000 and up Married filing jointly* $169,000 or less $169,001-178,999 $179,000 and up * If only one spouse contributes to an employer-sponsored plan. IRA Rollovers As more and more people switch jobs, change careers or retire early, the idea of transferring and consolidating retirement assets into a single account becomes more attractive. Consolidating retirement assets can make it easier to monitor and control your retirement plan. But, there are a number of potential tax consequences to rolling funds from one retirement account to another, so it is always wise to consult with your tax and other financial advisors before initiating such a transfer. Consider the following questions before moving any funds from other, pre-tax retirement accounts into your existing or new Traditional IRA. What is the withholding trap? The withholding trap is when you have to pay income taxes, and possibly penalties, on money you are transferring from one retirement plan to another. The trap is sprung when you request a distribution from your qualified plan in the form of a check made payable to you. Here s why: even if you intend to deposit the entire check into your IRA, your plan provider is required to withhold 20 percent of any retirement plan distribution paid directly to you. The tax laws state that once 20 percent is withheld (and thus, not deposited into your IRA), it becomes taxable to you as regular income even if you never received it. And if you have not yet attained age 59 1 /2, you may also be subject to a 10 percent tax penalty on the amount withheld. Can the withholding trap be avoided? Yes. The way to avoid the withholding trap is to have your assets rolled directly from your tax-qualified pension, profit-sharing, or other retirement plan into your IRA. Do not have the check made payable to you. If your funds are rolled directly from one plan provider to another, in essence, from your old retirement account into your new one, you will not be subject to taxes or penalties on the amounts rolled over. As a result, instead of transferring the full amount into your IRA, a portion of your money is lost to taxes and penalties. 3
Retirement Planning Retirement Planning Retirement Planning When am I eligible to roll funds from one qualified plan to another? Generally, you can roll funds from one qualified plan to a new one following a trigger event such as: n Separation from service* n Retirement n Termination of your old plan You may also be able to make an in-service withdrawal, which is a withdrawal allowed by your plan provider even if none of the above trigger events occur. * Early withdrawal penalties are not applicable when distributions are made to employees age 55 or older from a qualified plan after separation from service. This exception does not apply to IRAs. Can I roll a distribution into more than one IRA? Yes. But again, unless you roll the funds from your existing qualified plan directly into your new IRAs, a portion of your funds may be subject to federal withholding taxes. Are after-tax contributions eligible for a rollover? Yes. After-tax contributions may be rolled over from qualified plans to an IRA. If you rollover after-tax contributions into a Penn Mutual Traditional IRA, you are required to keep track of the after-tax dollars and file form 8606 with the IRS. Can I roll my distribution into an existing IRA? Yes, but the same rules and regulations noted above will apply. Are there any special rollover considerations if I have been receiving required minimum distributions or have attained age 70 1 /2? Yes. Before you request a rollover from your qualified plan or IRA to another IRA, you should request payment of your required minimum distribution for that year. Can I place only part of the distribution into a rollover IRA? Yes. However, you will have to pay ordinary income tax on the funds that you decide to keep. If you are under age 59 1 /2, you may also incur an additional 10 percent tax penalty. Is a Traditional IRA Right for You? Over the years, millions of people have achieved their retirement objectives through both good and bad economic times by saving money in an IRA. When considering a Traditional IRA, you will want to be sure to think about factors such as your age, current income, current tax bracket, future sources of retirement income, and future retirement needs. Then, ask your tax and other financial advisors to explain how the benefits and limitations of an IRA would work for you. Once you have a good understanding of your current situation, you will be better prepared to work towards acheiving a secure financial future. 4
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The Penn Mutual Family of Companies: w The Penn Mutual Life Insurance Company w The Penn Insurance and Annuity Company w Independence Capital Management, Inc. w Hornor, Townsend & Kent, Inc. w Penn Series Funds, Inc. w Janney Montgomery Scott LLC Please note: Any reference to the taxation of life insurance products in this material is based on Penn Mutual s understanding of current tax laws which are subject to change. You should consult a qualified tax advisor regarding your own personal situation. Penn Mutual s variable products are primarily offered through Hornor, Townsend & Kent Inc. (HTK), Registered Investment Advisor, Member FINRA/SIPC, 600 Dresher Road, Horsham, PA 19044, 215-957-7300. HTK is a wholly owned subsidiary of The Penn Mutual Life Insurance Company. HTK does not offer any tax or legal advice. 2011 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172 www.pennmutual.com 5 PM5429 7/11 A1JC-0802-10