Congress created Individual Retirement Arrangements (IRAs) in the 1970’s to encourage individuals to save money for their retirement. The Traditional IRA has gone through numerous changes over the years but still remains a viable option for a lot of people. The Roth IRA became available in 1998 and opened up additional doors for retirement savings including the potential for tax-free earnings.

Why do you need a custodian for your IRA?
Since Congress is providing certain tax incentives for saving money through an IRA, an IRA must meet Internal Revenue Code requirements, which include the use of a bank or other entity approved by the IRS to act as either trustee or custodian. A custodian is required to perform record keeping that tracks the activity within the account, produce statements for the account owner showing the activity and status of the account, and provide tax reporting of contributions, distributions, and fair market value to the account owner and the IRS.

Why do you need Community National Bank?
Flexibility. While almost every mutual fund company, annuity provider, bank and brokerage house will provide custody services for IRAs, few will custody the broad myriad of investments that are allowed with a self-directed IRA at Community National Bank (CNB). With a self-directed IRA at CNB you can hold both public and private stocks & bonds, mutual funds, annuities, certificates of deposit, REITs, UITs, Limited Partnerships, Private Placements, and other non-standard investments. You can consolidate your IRAs in one account while retaining diversification of assets and using an investment advisor of your choice.

All investments, with the exception of the CNB savings balance and any CNB certificates of deposit, are not FDIC insured; are not obligations of the bank; are not guaranteed by the bank; and involve risks, including possible loss of principal.

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Annual contributions to a Traditional IRA may be tax deductible depending on the Modified Adjusted Gross Income (MAGI) of the individual and whether or not they are covered by an employer’s retirement plan. (Please consult the following chart.) Earnings accumulate tax-deferred until withdrawn, at which time they are taxed at the ordinary tax rate of the individual. Individuals may contribute up to 100% of earned income or the maximum allowed, whichever is less. Regular IRA contributions are no longer allowed once an individual reaches their 70.5 year. At this point, an individual must begin removing funds from their IRA.

Traditional IRA ~ Allowable Deductions

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Roth IRAs became available in 1998 as a result of the Taxpayer Relief Act of 1997. The biggest difference from the Traditional IRA is the potential for tax-free earnings. Roth contributions are not tax deductible but earnings may be tax-free if withdrawn for qualified reasons. In addition, contributions can be made past the 70.5 year if income guidelines are met. (See charts or consult IRS Publication 590 or other materials for more information.)

Roth IRA Allowable Contributions

Roth IRA Distributions

* A 10% penalty will apply to converted funds withdrawn in the first five years. If conversions are done in more than one tax year, each conversion will have a separate five-year clock.

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A SEP is a business retirement plan established and administered by the employer. It allows the employer to take a tax deduction for contributions made to his/her employees’ Individual Retirement Accounts (IRAs). Contributions are discretionary each year and may range from 0 to 25% of compensation. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) raised the maximum compensation limit to $200,000, beginning in 2002 with adjustments of $5,000 annually if the COLAs warrant it.) The contribution percentage must be the same for the employer and all eligible employees. Once the funds are deposited in the Traditional IRA, they become subject to the standard IRA rules and regulations. The contributions plus earnings are taxable to the IRA account owner upon withdrawal and may be subject to a 10% penalty if withdrawn prior to reaching age 59.5.

With the passage of EGTRRA, came higher contribution amounts in addition to a $500 catch-up contribution for those individuals age 50 and over. The contribution limit is an aggregate limit per year for Traditional and Roth IRAs.

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Once an individual reaches the year in which they turn age 70.5, they are no longer eligible to contribute to a Traditional IRA and must begin taking distributions. The following formula is used to calculate a RMD:

Adjusted IRA Balance divided by Distribution Period = RMD

Following is a table of the Uniform Distribution Period, which will be used by all IRA owners – with one exception. An IRA owner, who has named his/her spouse as the sole beneficiary, for the entire year, will use the joint life expectancy table if the spouse is more than ten years younger than the IRA owner.

Uniform Distribution Period

Transfer – A transfer is a movement of cash or investments between like IRAs from one custodian to another. The account owner does not take constructive receipt of the funds, therefore the transaction is not reported to the IRS.

Rollover – A rollover occurs when funds are paid directly to the IRA owner as a distribution and the IRA owner deposits the funds into another IRA within 60 calendar days of receipt. The distribution will be reported on Form 1099-R by the firm issuing the funds. The receiving custodian will report the rollover on Form 5498. Funds may only be rolled between IRAs once in a twelve month period.

Direct Rollover – A direct rollover occurs when cash or investments are delivered directly from a Qualified Plan to an IRA. Since the movement of funds is between unlike plans, the qualified plan will report the distribution on Form 1099-R and the IRA custodian will report the direct rollover on Form 5498.

Conversion – A conversion occurs when funds are moved from a Traditional IRA to a Roth IRA. The value of the account becomes taxable income to the account owner in the year the conversion occurs. (A Form 1099-R and Form 5498 are both issued to report the conversion.) Once funds are converted to the Roth IRA, any earnings or increase in value may potentially be tax-free upon withdrawal.

For further information on IRAs, please consult IRS Publication 590, your tax, legal and/or financial advisor.