Individual Retirement Accounts (IRAs)

Traditional IRAs: If you are just starting to save for retirement and do not have a pension plan at your place of business, the most logical way to begin is with a traditional IRA. With an IRA account you can make annual contributions of up to $4000 or 100% of your earned income, whichever is less. Earnings are tax-deferred until withdrawn anytime after age 59 ½ (there’s a 10% penalty if withdrawals are made before age 59 ½). Withdrawals must be made beginning at age 70 ½ at minimum amounts established by the IRS.

Rollover IRAs: If you are changing jobs or retiring, and you have a company 401(k), 403(b) ESOP, profit-sharing or other plan, you may need an IRA Rollover account. The IRS requires a 20% withholding tax be applied to a distribution unless you:

  • “Rollover” your funds directly from your employer to an IRA Rollover account;
  • Transfer your funds directly from your old employer to your new employer; or
  • Leave your funds at your old employer if that plan permits (a less flexible option).

These options can avoid tax and preserve the tax-deferred status of your retirement savings.

Roth IRA (Contributory): Although Roth IRAs are not “deductible,” you can save up to $4000 annually after tax ($8000 for couples), hold for five years and then never pay any federal tax on the money you earn…if it’s withdrawn after age 59 ½ or you become disabled, or is paid out when you die. After five years, up to $10,000 can be used tax-free on the purchase of your first home. You can withdraw up to the amount of your contribution at any time with no penalty or taxes. There is no requirement that you start withdrawing at age 70 ½. Singles with adjusted gross income of up to $95,000 to $110,000 can contribute to a Roth IRA. For couples, the range is $150,000 to $160,000. You can have a Roth IRA and a tax deductible IRA, if you want, but your annual contribution for both cannot exceed $4000.

Roth IRA (Conversion): With certain qualifications, taxpayers with non-Roth IRAs can rollover or convert them to Roth IRAs. Such rollovers and conversions are treated as taxable distributions, but are not subject to the 10% penalty tax on the pre-age 59 ½ distributions. Such rollovers cannot be made if the taxpayer’s adjusted gross income for the year exceeds $100,000 or if he or she is a married individual filing a separate return for the year. A Roth IRA may not be suitable for all investors.

Educational IRAs: You can save up to $2000 a year, after tax, toward the education of your children. You can have separate accounts for each child. Earnings accumulate on a tax-deferred basis and become tax free if used for higher education in a qualified trade school, community college or four-year college. Like the Roth IRA, Education IRAs start phasing out for singles with income over $95,000 and couples over $150,000.

SEP IRAs: If you are self-employed or a small business owner, City Securities Corporation professionals can help you open and maintain an IRA for yourself as well as your employees by opening what is called a SEP IRA. Under this type of plan, the employer contributes equal percentages to each employee as he or she contributes to his or her own SEP IRA. With a SEP you can:

  • Take advantage of generous contribution limits. You decide each year the percentage you wish to contribute, up to the lesser of 25% of compensation or $40,000 per eligible employee.
  • Shelter income from taxes. All contributions are tax-deductible; earnings are tax-deferred.
  • Ensure cost flexibility. There are no requirements on the frequency or amount of contributions. Plus, you are only obligated to contribute for eligible employees.
  • Attract and reward eligible employees. You are only required to contribute for employees who: 1) are age 21 or over; 2) earned at least $300 in 2002; and 3) have worked for you three of the last five years. You may designate less restrictive requirements to some degree. 

SIMPLE IRAs: Some retirement plans have often appeared too complicated and costly for small companies to set up and maintain. That is why Congress designed the SIMPLE (Savings Incentive Match Plan for Employees) IRA – so that small companies can overcome the perceived hurdles to offering a retirement plan. 

A SIMPLE IRA is easy to set up and easy to administer. Unlike many retirement plans, this one has no complicated government reporting or filing requirements. A SIMPLE IRA offers real tax advantages for employers as well as employees. Contributions are tax-deductible for your company and pre-tax for your employees…and any earnings can grow tax-deferred. Participants can choose how to invest the money in their SIMPLE IRAs and control their own retirement savings. Employee contributions are voluntary, up to $8000 per year, may not exceed 100% of compensation and may be changed with appropriate notice as defined in your plan. There are no complex formulas for vesting. Your company has two different options for making the required contributions to your employees’ SIMPLE accounts. Rules regarding distributions from a SIMPLE IRA are identical to those from an IRA in these three situations:

  • Participants are allowed to begin taking distributions, penalty-free, at age 59 ½
  • Withdrawals prior to age 59 ½ are subject to a 10% tax penalty
  • Participants may choose to wait and give their SIMPLE IRA more opportunity for compounded growth, but they must begin taking distributions by age 70 ½

The rules differ in this situation: Distributions are subject to a 25% early-withdrawal penalty, regardless of age, when they are taken within two years of when an employee begins participating in the SIMPLE IRA plan.

Businesses of any type – medical, legal, architectural, consulting firms, advertising, agencies, small manufacturers, real estate agents, car dealers, restaurants and not-for-profits (just a few examples) – may establish a SIMPLE IRA if they meet certain criteria.