What’s a Traditional IRA?

Traditional IRA--The traditional IRA is an account that allows you to defer taxes on the earnings on your contributions until they are withdrawn. Also, certain contributions are tax deductible in the tax year for which they are made.

Why should you invest in a Traditional IRA at Bank of Zumbrota?

IRAs are an important part of your financial future.
An IRA at the Bank of Zumbrota is FDIC insured, safe and convenient.
You are looking for an income tax deduction for the current tax year.
You meet the qualifying guidelines, as discussed in this brochure.
You are self employed and have no other retirement program.
You feel that you will be in a low income tax bracket in your retirement years.
You need to move (rollover) other retirement funds from a former employer that may be in a:

1. 401K PLAN
2. 403B PLAN
3. 457 PLAN (Gov’t deferred compensation plan)
4. SIMPLE IRA E) TAX SHELTERED ANNUITY

Am I Eligible for a Traditional IRA Account?

If you are younger than age 70 1/2 for the entire tax year and have earned income (or your spouse has earned income), you are eligible to establish a new traditional IRA and/or make contributions. For a rollover, income does not matter.

You are eligible to establish a traditional IRA even if you already participate in or are receiving contributions from a retirement plan sponsored by your employer, which may include certain government plans, tax-sheltered annuities, Simplified Employee Pension (SEP) plans, Savings Incentive Match Plans for Employees of Small Employers (SIMPLE), or qualified plans.

Your contribution may be tax deductible in the year for which they are made; it depends on your income and whether or not you already contribute to an employer sponsored qualified plan, like a 401K. If you contribute to a qualified plan then the deductibility of your contribution depends on your income. See the chart for more information:

There will be an increase in MAGI thresholds starting 2002

(These are the limits if you are already in another type of qualified plan. If you are not in another retirement qualified plan, then there is no income limit to be able to make a tax deductible contribution. You just have to make at least as much as the contribution itself.)

How Much Can I Contribute?

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 increased the contribution amounts for both traditional and Roth IRAs. EGTRRA further increased contribution amounts for IRA owners who attain age 50 or older by the end of the year, allowing them to "catch-up" on their lost retirement savings.

*COLAs are potential cost-of-living adjustments each year starting in 2009.

You can contribute the lesser of the amount applicable to you each year or 100 percent of your earned income.

The chart shows the aggregate amount that you can contribute to any Roth and/or traditional IRA for each year. For example, if you are younger than age 50 and contribute $500 to a traditional IRA, the most you could contribute to a Roth IRA is $2,500 for 2002.

What Deductions Are Available?

Deductibility of your contribution is based on whether or not you are an active participant in an employer-sponsored retirement plan. For example, if you are single and not an active participant, you are eligible for a full deduction of your contribution, no matter how high your income. If you or your spouse are an active participant, the deductible amount is dependent on your MAGI and income tax-filing status. You may be eligible for the maximum deduction, a partial deduction, or no deduction. Your tax professional can help you determine whether your contribution is deductible. Even if you are not eligible for a deductible contribution, you can still make nondeductible contributions to a traditional IRA and take advantage of the tax-deferred earnings.

Do I Pay Taxes on the Earnings When Distributed?

Yes. All earnings on your traditional IRA contributions (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the account. They are then taxed as income in the year they are withdrawn.

Do I Pay Taxes on the Earnings?

All earnings on your traditional IRA contributions (deductible and/or nondeductible) remain tax deferred until you make withdrawals from the account. They are then taxed as income in the year they are withdrawn.

When Can I Withdraw Funds Without Incurring the 10 Percent Premature-Distribution Penalty Tax?

You can withdraw funds from your traditional IRA without incurring the 10 percent premature-distribution penalty tax any time after you reach age 59 1/2. You can avoid the penalty tax before age 59 1/2 for the following reasons: disability, substantially equal periodic payments, medical expenses in excess of 7.5 percent of your adjusted gross income, health care insurance if you have been receiving unemployment compensation for at least 12 weeks, distributions paid directly to the IRS due to an IRS levy, conversion to a Roth IRA, recharacterization, rollover to a qualified plan, qualified higher education expenses, or a first-time home purchase.

How Are Funds Taxed at Distribution?

All distributions are fully taxable unless you made non-deductible contributions. That portion of the distribution is not taxable when withdrawn.

When Must I Withdraw Funds?

When you reach your age 70 1/2 year, you must begin to take minimum required distributions or risk additional penalty taxes.

How Do I Find Out More About IRAs?

See any of our IRA representatives. We will explain the nature of these accounts in more detail and help you complete the forms necessary to establish your traditional and/or Roth IRA.

This information is effective for tax-year 2002 and thereafter. This brochure is intended to provide general information concerning IRAs. It is not intended to provide legal advice or to be a detailed explanation of the regulations covering these accounts or how they may apply to your individual circumstances. For specific information, you are encouraged to consult your tax or legal professional. IRS Publication 590, Individual Retirement Arrangements, and the IRS' web site, www.irs.gov, may also provide helpful information.

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