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IRA Frequently Asked Questions


The Individual Retirement Account offers you the opportunity to save money on a tax-deferred basis for your retirement years. Save money now and pay taxes later, allowing the interest to continually compound in your account until you withdraw your funds.

First National Bank in Olney is providing the answers to the most commonly asked questions about IRAs:

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How do I open an IRA?
 

If you are interested in opening an IRA, you will need to speak with a Personal Banker at First National Bank in Olney.  You may also call 618-395-8541 or 888-937-3178.  We are here to answer any questions you may have and help you complete the necessary forms to establish your new retirement account.

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Am I Eligible for an IRA?
 

Yes, if:
  • You are under age 70 ½ for the entire tax year
  • You have compensation from wages or salaries that you have received as an employee (all taxable alimony is considered compensation, even if you already participate in an employer's retirement plan)
  • You are self-employed and have compensation from personal services performed for the business

For a Roth IRA, your modified adjusted gross income (MAGI) must also meet certain limits.

See your tax or legal professional for assistance in determining IRA eligibility.

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What's the difference between a Traditional IRA and a Roth IRA?

Traditional: Allows you to defer taxes on your earnings until they are withdrawn. You may also be able to deduct what you contribute each year from your taxes.

Roth: Qualified distributions (both what you have contributed and your earnings) are tax-free.  However, your contributions each year cannot be deducted from your taxes.  Since your contributions are taxed in the year they are earned, you may benefit more from a Roth IRA if you anticipate being in a higher tax bracket when you retire.

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How much can I contribute?

You are permitted to annually contribute a maximum amount or 100% of your earned compensation and alimony; whichever is less.

Spousal IRA rules enable married couples filing jointly to contribute the maximum amount to their separate IRA accounts even if one spouse has little or no earned income.  To qualify, their combined earned income must be equal or greater than the total contributed amount.

You will need to contact a Personal Banker at First National Bank in Olney to receive the annual contribution limit dollar amounts.

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Can I get a tax deduction for what I contribute?

Your ability to deduct your contributions is based on whether or not you and/or your spouse, if married, are an active participant in an employer-maintained retirement plan. If you are not, you may deduct all of your contributions up to the contribution limit. If you are an active participant, your deductible amount is based on your modified adjusted gross income (MAGI) and your income tax-filing status.

See your tax or legal professional for assistance in determining IRA deductibility.

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What if I'm not eligible to deduct my contributions?

Traditional: You can still make non-deductible contributions to your Traditional IRA.  These non-deductible contributions are not subject to income tax or a 10% penalty tax when withdrawn.

Roth: Your contributions are non-deductible.

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Do I pay taxes on the earnings?

Traditional: All earnings (deductible or non-deductible) are tax-deferred until you make withdrawals on your account. The earnings are then taxed as income in the year they are withdrawn.

Roth: No taxes are paid on your earnings, provided they are withdrawn as a qualified distribution. A qualified distribution is when a withdrawal is made for one of the following reasons after the 5 year holding period:

  • You are age 59 ½ or older
  • You experience a permanent disability
  • You are making a first-time home purchase (may withdraw up to $10,000)
  • Payment to a beneficiary upon your death

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When can I withdraw funds without incurring the 10% IRS penalty?

Traditional: Any time after you are age 59 ½. You may avoid the penalty before age 59 ½ for the following reasons:

  • You become disabled
  • Substantially equal periodic payments
  • Payment of certain unreimbursed medical bills
  • Health care insurance premiums, if you've been receiving unemployment compensation for at least 12 weeks
  • Distributions paid directly to the IRS due to an IRS levy
  • Qualified reservist distributions
  • A first-time home purchase (may withdraw up to $10,000)
  • Qualified education expenses*

    * Coverdell Education Savings Accounts are available.  Contact a Personal Banker at First National Bank in Olney for more details.

Roth: The 10% premature distribution penalty does not apply on the earnings for any qualified distribution or one of the reasons listed below.  Distributions of assets converted from an IRA or assets rolled over from an employer plan that are taken as a qualified distribution, after the five year holding period, or for one of the reasons listed below also avoid the penalty.

  • Substantially equal periodic payments
  • Payment of certain unreimbursed medical bills
  • Health care insurance premiums, if you've been receiving unemployment compensation for at least 12 weeks
  • Distributions paid directly to the IRS due to an IRS levy
  • Qualified reservist distributions
  • Qualified education expenses*
  • Within the first five years of holding the IRA for any of the following reasons:
    • You are age 59 ½ or older
    • You experience a permanent disability
    • You are making a first-time home purchase (may withdraw up to $10,000)
    • Payment to a beneficiary upon your death

    * Coverdell Education Savings Accounts are available.  Contact a Personal Banker at First National Bank in Olney for more details.

Distributions of earnings from your Roth IRA are subject to both taxes and the 10% IRS penalty if taken for any other reason than those listed above.

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How are funds taxed at distribution?

Traditional: If you're over the age of 59 ½, the deduction of your contributions plus all of your earnings are to be included as income.  If you're under the age of 59 ½ and do not meet one of the given exceptions, you will also be charged a 10% IRS penalty for a premature distribution.

Non-deductible contributions or rollovers of after tax assets are not taxable when withdrawn, nor are they subject to the 10% premature distribution penalty.

Roth: Qualified distributions are not subject to federal income taxes, although state taxes may apply. In addition, the contributions you make to your Roth IRA are not taxed, nor are they subject to the 10% IRS penalty when distributed. You can always get your principal tax-free and penalty-free for any reason.

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When am I required to withdraw funds?

Traditional: The year you reach age 70 ½.

Roth: No required distributions.

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What happens to my IRA in the event of my death?

Your named beneficiary(ies) will receive the entire proceeds of the IRA.

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What are Self-Directed IRAs?

Self-Directed IRAs are "directed" by the owner into a variety of investment alternatives, including mutual funds, stocks, bonds and annuities. A First National Bank Investment Center Registered Representative or the Trust Department at First National Bank in Olney can assist you with your investment options.

In general, an IRA owner can choose his/her investments from those offered by their IRA Custodian/Trustee.  Traditionally, those types of investments were time deposits and savings accounts.  An IRA owner looking for investment alternatives may choose a Self-Directed IRA in which investments are "directed" by the IRA owner.  Self-Directed IRA owners can take advantage of a vast array of investment possibilities.  Examples of other types of investment alternatives are stocks, bonds, mutual funds, real estate, annuities, or other marketable securities.  IRA rules and regulations apply.

For more information or to begin your Self-Directed IRA, please call 618-393-8249 or 888- 937-3178.

Access
A Self-Directed IRA is established with a brokerage firm like First National Bank Investment Center or the Trust Department at First National Bank in Olney and permits the owner to change the investments or portfolio composition at will.

Types of Self-Directed IRAs
Self-Directed IRAs can be established for any type of IRA. These include:

  • Traditional IRA
  • Roth IRA
  • SIMPLE IRA
  • SEP IRA

Advantages of a Self-Directed IRA

  • The IRA may be invested in investments that have historically provided more return than traditional bank products.
  • The investments may be controlled by the account owner, which provides the ability to take advantage of investment opportunities as they arise.
  • Numerous types of investments can be held in one account.

 

What's a Coverdell Education Savings Account (CESA)?

A Coverdell Education Savings Account (CESA) is a non-deductible account that features tax-free withdrawals specifically for a child's education expenses.

Though similar to the Traditional and Roth IRAs, the CESA differs in that the distributions from the account are both penalty-free and tax-free, while qualified education distributions from a Traditional or Roth IRA are only penalty-free and subject to taxes.

Am I eligible to contribute to a CESA?
How much can I contribute?
How is "Child" defined?
Do I pay taxes on the earnings?
What are "qualified education" expenses?
What is a "non-qualified" distribution?
Can I move funds from my Traditional or Roth IRA into a CESA?

Am I eligible to contribute to a Coverdell Education Savings Account (CESA)?
Yes, if the child for whom you are contributing has not had any contributions made on his or her behalf to a state prepaid tuition program in that year. Your modified adjusted gross income (MAGI) must also meet certain limits.

There are no compensation requirements or age restrictions for contributors.  You do not even need to be related to the child you are contributing for.

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How much can I contribute?
There is a total aggregate contribution limit into one or more CESAs on behalf of any child.  You may deposit this maximum amount into separate CESAs for as many children as desired.  As a contributor, your allowable contribution depends on your modified adjusted gross income (MAGI) according to specific limits.

You will need to contact a Personal Banker at First National Bank in Olney to receive the annual contribution limit dollar amounts.

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How is "Child" defined?
A "child" is defined as a person who is younger than age 18. A child's eligibility for CESA contributions ends after the date he or she attains the age of 18.  Children with special needs are not subject to this restriction.

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Do I pay taxes on the earnings?
No, and neither does the child, provided the money is used for qualified education expenses. Although you cannot deduct any of the contributions that you make, taxes do not apply to the earnings portion when the assets are withdrawn for education expenses.

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What are "qualified education" expenses?

Higher Education: Qualified education expenses are tuition, fees, books, supplies, equipment, and room and board required for the enrollment or attendance at an eligible higher education institution, which includes an area vocational school, college or university.

Elementary and Secondary Education: This includes kindergarten through grade 12 at a public, private or religious school as determined under state law.  Like higher education, tuition, fees, books, supplies, equipment, and room and board are qualified expenses.

Distributions must be made during the year in which the education expense occurred.

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What is a "non-qualified" distribution?
It is any distribution other than for an education expense. If distributions exceed educational expenses, the additional amount withdrawn is a non-qualified distribution.  When a non-qualified distribution is taken, it is made up of both the contribution made and the earnings on that amount. The earnings portion will be subject to taxes and a 10% penalty.

Distributions made on account of death, disability or amounts included in income because of the receipt of certain educational assistance or scholarship avoid the 10% penalty tax.

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Can I move funds from my Traditional or Roth IRA into a CESA?
Unfortunately, no. However, you can roll assets over from one CESA into a second CESA established for the same child.  You can also roll CESA assets into a CESA for a different designated beneficiary if he or she is a member of the same family (as defined by law).  That way, if a child decides not to pursue education, the responsible individual can roll over the CESA assets to the CESA of a relative who does.

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