IRAs & EDUCATION SAVINGS

Individual Retirement Accounts

An IRA is an individual retirement arrangement, which can be an individual retirement account or an individual retirement annuity. It is a personal savings plan that allows you to set aside money for retirement with tax advantages.

There are two primary types of IRAs: Traditional and Roth. Depending on which one you choose, you may be able to deduct some or all of your contributions. You also may be eligible for a tax credit equal to a percentage of your contribution. 

Traditional

With a Traditional IRA, assuming you’re eligible, your contributions are tax-deductible. Your earnings grow tax-deferred, so you will not pay income taxes on your investment earnings until you make withdrawals. Both deductible contributions and earnings are then taxed at your regular income tax rate when the money is withdrawn.

Roth

Contributions you make to a Roth IRA are never tax-deductible, so they will always be tax-free upon distribution. Your earnings grow tax-deferred, so you will not pay income taxes on your investment earnings until you make withdrawals. And if you take a “qualified distribution,” your earnings are tax-free.

You are eligible to contribute to a Traditional IRA if you are under age 70½ and you have eligible compensation. For IRA purposes, eligible compensation generally is defined as the money you earn from working and includes wages, salary, tips, bonuses, commissions, and self-employment income, but not investment or pension income. If you are a non-earning spouse under the age of 70½ who files a joint tax return with a working spouse, you also are eligible to contribute to a Traditional IRA.

You can contribute to a Roth IRA if you have eligible compensation below or within the modified adjusted gross income (MAGI)* limits. Unlike the Traditional IRA, there is no age restriction; you can contribute to a Roth IRA even after turning age 70½.

*Modified adjusted gross income (MAGI) is your adjusted gross income from your IRS federal Form 1040 or 1040A tax return with the following added back: any Traditional IRA deduction, foreign earned income exclusion, student loan interest deduction, tuition and fees deduction, foreign housing deduction or exclusion, U.S. savings bond interest exclusion, domestic production activities deduction, or adoption expenses. For Roth IRA purposes, MAGI also excludes any income reported from the conversion of a Traditional IRA to a Roth IRA.

Educational Savings Accounts

Educational Savings Accounts (ESA’s) are an ideal way for you to begin saving money to help a child, grandchild, or any young person pay for education expenses. Here are some of the benefits:

Annual contribution limit

The contribution limit is $2,000 per child/beneficiary. The adjusted gross income limit for married joint filers and and married taxpayer filing jointly with income under $190,000 can contribute the maximum $2,000 per year per child.

School expenses

K-12 school costs were added to the list of qualified expenses. This includes home computer equipment, Internet access and tutoring.

Age changes

Waiver of age limitations for children with special needs. The law allows contributions for individuals with special needs beyond age 18 and no mandatory pay-out at age 30.

Whichever IRA you choose, you're making a sound investment in your future. In fact, let us do it for you. Take advantage of our Automatic IRA Contribution Program. Have your annual IRA contribution made from your Prince George’s Community Federal Credit Union savings or checking account, or allocate a payroll deduction to your Contributory IRA. Just keep in mind what the tax-deferred benefit of IRAs can do for your money over time. Whether saving for a first-time home purchase, a child's education or retirement, there's little question an IRA can do great things for you.