Has your current advisor discussed your risk comfort level recently? Call Capital Choice Advisors today or Click Here for more information!

704-542-5499

Investment Planning

How Do I Choose The Right Investment?

What are the advantages of a traditional IRA?

How Can I Benefit From A Roth IRA?

Is a Variable Annuity Right For Me?

How Do I Choose The Right Investment?

The Perfect Investment
Once an individual or family has reached the stage in life where there is enough income to easily pay the monthly bills, there is often a desire to put the excess monthly cash flow to work.  For some, inheritance, a large bonus, or a distribution from a qualified plan can provide an investable, lump sum of money.  For most people, the key question is, “How do I put this money to work?”  In a perfect world, the answer would be an investment that has certain, ideal characteristics:

• High rate of return:  A total return high enough to out perform inflation and taxes, and still meet the investment goal.
• Complete safety:  There would be no concern that any part of the investment could ever be lost.
• Always liquid:  An investor would be able to redeem the investment, and receive cash, at any time of day or night, every day of the year without penalty or loss of principal.
• No income taxes:  There would never be any income taxes due on the investment’s yield or growth.  The investor keeps everything earned.
• No skill or knowledge required:  No special skill or knowledge would be required to manage the investment.  One could just forget about the investment and enjoy life.

But In The Real World…
Such a perfect investment does not exist, of course.  In the real world, individual investors must choose from a confusing range of investment tools, each with different characteristics and uses.  The process of selecting the best investment for a particular need or situation is made easier by clearly answering the following questions:

• Why are you investing?  Do you need income for current expenses or are you accumulating money for a future need?
• When will the money be needed? At any moment?  A year from now? At retirement, 25 years from now?
• How much risk are you willing to undertake?  Can you afford to lose all or a part of the investment, and not have the loss affect how you live?
• Are income taxes a concern?  If the investment is currently taxable, to what extent will the additional tax reduce investment growth or push you into a higher tax bracket?
• What is the economic outlook?  Investment opportunities will vary depending on whether the economy is growing and shrinking.
• Do you have the skill and knowledge needed to manage your investment?   Is the professional investment management needed?
• How much money is there available to invest?  Are smaller amounts available, or is there currently a larger, lump sum of money?

Back to Top

What are the advantages of a traditional IRA?

Deadline to Establish an IRA
An IRA can be established and funded at any time from January 1 of the current year and up to and including the date an individual’s income tax return is due (generally, April 15 of the following year), not including extensions. 

Can Deduction Be Taken Prior to Investment of the Funds?
Yes!  This, in effect, permits an individual to file his return early in the year (e.g. January) and use his or her tax refund to make the actual contribution prior to April 15.  See Rev. Rul. 84-18, 1984-1 CB 88. 

Types of Arrangements Permitted
There are currently two types of IRAs.

• Individual retirement accounts: These are trusts with a corporate trustee.
• Individual retirement annuities: These are special annuities issued by an insurance company.

Contribution and Deduction Limits
A wage earner may contribute and deduct the lesser of $3,000¹ or 100% of compensation for the year.  If the wage earner is married, an additional $3,000 may be contributed and deducted on behalf of a lesser earning (or nonworking) spouse, using a spousal IRA.  This means the family unit may contribute up to a total of $6,000² as long as the family compensation is at least that amount. 

Other Retirement Plans May Reduce or Eliminate Deductions
Taxpayers who participate in an employer’s plan may make fully deductible IRA contributions only if their adjusted gross income (AGI) is below $60,000 if married filing jointly, $40,000 if single and $0 if married filing separately.  If AGI exceeds these amounts, the $6,000 family or $3,000 individual limit is reduced by a formula which eventually permits no deduction.  No IRA deduction is allowed for married couples filing jointly with AGI over $70,000, single individuals with an AGI over $50,000 and married couples filing separately with an individual AGI over $10,000³ 

For a taxpayer who is not an active participant in an employer plan, but whose spouse is, the maximum deductible IRA contribution is phased out if their combined AGI is between $150,000 and $160,000.

Employer plans include: regular qualified plans; Keogh plans; sec. 403(b) tax-sheltered annuity plans; simplified employee (SEP) plans; SIMPLE plans; and state, federal and local government plans (except Sec. 457 nonqualified deferred compensation plans).

Individuals with income in excess of the above limits may wish to make contributions to a ROTH Ira on a nondeductible basis.

Distributions, Withdrawals and Taxation

Typical distribution plans

• Single-sum distribution:  Becomes part of taxable income for that year (less any nondeductible contributions)
• Life expectancy:  Each year, participant calculates payout based upon the attained – age life expectancy, as determined by the federal government.
• Life annuity:  For individual retirement annuities only, participant/annuitant may elect guaranteed income for life (and the life of a joint annuitant, if desired).

Premature distributions:  Withdrawals and distributions prior to age 59 1/2 are subject to a 10% penalty tax, in addition to current income tax, unless one or more of the following apply⁴.

• A distribution is made because of the death or disability of the participant.
• A distribution is paid as an annuity over the life of the participant, or the joint lives of the participant and a designated beneficiary.  The 10% penalty is triggered if the distribution schedule is modified within five years or before annuitant of age 59 1/2, if later.
• The distribution is rolled over into another IRA.
• The distribution is used to pay for medical expenses in excess of 7.5% of AGI.
• The IRA is withdrawn by an unemployed individual to pay health insurance premiums. (Only applies to certain situations.)
• The IRA distribution is used to pay for qualified, higher education expenses for the individual, a spouse, a child or grandchild.
• For a first-time homebuyer, there is a lifetime exception of $10,000 from the 10% penalty tax⁵.  The purchaser of the home may be the individual, a spouse, a child or a grandchild.  A first-time homebuyer is someone (or his or her spouse) who had no ownership in a principal residence during the preceding two years prior to the purchase of the new home.

Required distributions: Minimum distributions must begin by April 1 of the calendar year following the year which the participant reaches 70 1/2.  However, if the distribution is received in the year following attainment of age 70 1/2, two distributions are required in that specific year.  Thereafter, the minimum distribution must be made by the end of each calendar year.  The minimum distribution may be paid using one of two methods:

• Over the life expectancy of the participant:  In general, the required minimum distribution is calculated using the IRA participant’s attained age and a minimum distribution factor table prescribed by the IRS⁶.
• Spouse more than 10 years younger:  If the participant’s spouse is more than 10 years younger than the participant and the spouse is the IRA’s sole designated beneficiary for the entire calendar year, the minimum distribution factor used in calculating the required distribution amount is determined in accordance with the Joint and Last Survivor Table specified in Treas. Reg, 1.401(a)(9)-9, Q&A3.  The participant’s marital status is determined on January 1 of the calendar year.  A 50% excise tax is levied⁷ on amounts that should have been distributed, but were not.

Taxation of distributions

• During Life:  Distributions are taxable as ordinary income.⁸
• At Death:  At the participant’s demise, the distributions received by a beneficiary are taxed as ordinary income.⁵  If the participant dies before payments have begun, distributions must generally be paid out over a five-year period or less, or over the life expectancy of a designated beneficiary, if payments begin by December 31 of the following year following the year of the participant’s death.  If the distributions are paid solely to the surviving spouse, they may be paid out over the life expectancy of the spouse and must begin by the end of the year in which the participant would have attained age 70 1/2.⁶ If the surviving spouse elects to treat the IRA as his or her own, distributions must begin by April 1 of the year following the year in which the surviving spouse attains age 70 1/2.  Caution is required in making a QTIP trust the beneficiary of an IRA.  For federal estate tax purposes, the value of the IRA is included in the gross taxable estate of the participant.

Investment Alternatives

• Banks and savings and loans:  Certificates of deposits are generally insured by the FDIC.  Fixed and variable rates are available.  There may be stiff penalties for early withdrawal.

• Annuities:  Traditional individual retirement annuities issued by life insurance companies can guarantee fixed monthly income at retirement and may include a disability wavier of premium provision.  Variable annuities do not guarantee a fixed monthly income at retirement.
• Money market:  Yield fluctuates with the economy.   Investor cannot lock in higher interest rates.  It is easy to switch to other investments.
• Mutual funds:  A wide variety of mutual funds with many investment objectives are available.
• Zero coupon bonds:  Bonds are issued at a deep discount from face value.  There are no worries about reinvesting interest payments.  Zero coupon bonds are subject to inflation risk and interest rate risk.
• Stocks:  A wide variety of investments (and risks) is possible.  Losses are not deductible.
• Limited partnerships:  Some limited partnerships are especially designed for qualified plans, specifically in the areas of real estate and mortgage pools.

 Prohibited Investments or Transactions

• Life insurance:  IRAs cannot include life insurance contracts.
• Loans to IRA taxpayer:  Self-borrowing triggers a constructive distribution of the entire amount deemed distributed.  It becomes currently taxable plus a 10% penalty if the account owner is under age 59 1/2.
• Collectibles:  Purchase of art works, antiques, metals, gems, stamps, etc., will be treated as a taxable distribution.  Coins are issued under state law and certain U.S. gold, silver and platinum coins are exceptions.  Certain kinds of bullion may be purchased.
• IRA as collateral:  Using the IRA as a security for a loan, e.g; buying stock on margin, will trigger a distribution tax.

Other Factors to Consider

• Is the interest rate fixed or variable?  If interest rates drop, a fixed rate may be better, especially if you can make future contribution at the same fixed rate.  If interest rates go up, you may be able to roll the current IRA over to another IRA.
• What is the yield?  More frequent compounding will produce a higher return?
• How often can you change investments? Is there a charge?

Back to Top

How Can I Benefit From A Roth IRA?

Similar to the concept of the traditional IRA, the Roth IRA differs in that contributions are never deductible and, if certain requirements are met, distributions from the account may be received free of federal income tax.⁹

Establishing a Roth IRA

Annual contributions:  A Roth IRA may be established and funded at any time between January 1 of the current year, up to and including the date an individual’s federal income tax return is due, (generally April 15 of the following year), not including extensions.  The account must be designated as a Roth IRA at the time it is established.

Conversion of existing IRA account:  IRC Sec. 408A, which provides for Roth IRAs, allows an existing, traditional IRA (either an annual contribution IRA or a rollover IRA) to be converted to a Roth IRA.  The conversion from the old traditional IRA to the Roth IRA results in a taxable event.  Previously, deducted IRA contributions and all earnings in the account are added to the taxpayer’s gross income for the year of the conversion.¹⁰

Any 10% excise tax (penalty for withdrawals before age 59 1/2), which might apply to converted amounts, is waived.  However, if a taxpayer withdraws amounts from the converted Roth IRA within five years of the year of conversion, the 10% excise tax will apply to those amounts deemed to be part of the conversion.¹¹

The taxpayer making the conversion must have an adjusted gross income (AGI) of $100,000 or less in the year of conversion or no conversion is permitted.¹²   The law also prohibits conversion if a taxpayer is using the married filing separate status.  A taxpayer who converts amounts from a traditional IRA to a Roth IRA may reverse the transaction¹³ and recharacterize during a tax year.  For example, assume that the taxpayer converts and then unconverts a Roth IRA in 2003.  In general, the taxpayer must wait until tax year 2004 before converting amounts from a traditional IRA to a Roth IRA.¹⁴  The recharacterization of the converted amounts must generally be made by the due date for the taxpayer’s return, plus any extensions.¹⁵

Types of Arrangements Permitted
There are currently two types of Roth IRAs.

• Individual retirement accounts:  These are trusts with a corporate trustee.
• Individual retirement annuities:  These are special annuities issued by a life insurance company.

Contribution Limits

Limits:  For 2003, a wage earner may contribute (but not deduct) the lesser of $3,000 or 100% of compensation earned for the year.  If the wage earner is married, an additional $3,000 may be contributed on behalf of a lesser earning (or nonworking) spouse, using a spousal account.  A husband and wife may contribute a total of $6,000, as long as their combined compensation is at least that amount.?

Contribution phase out:  The maximum contribution to a Roth IRA is phased out for single taxpayers with an adjusted gross income between $95,000 and $110,000.  For married couples filing jointly, the phaseout range is an AGI of $150,000 to $160,000.  For married individuals filing separately, the phaseout range is an AGI of $0 to $10,000.

Other IRAs:  The contribution limits for a Roth IRA are coordinated with those of the traditional IRA; a taxpayer may not contribute more than $3,000 ($6,000 for a married couple) per year into a single IRA or a combination of traditional and Roth IRAs.  Excess contributions to a Roth IRA are subject to a 6% excise tax, for each year that any excess remains in the account.¹⁶

Taxation of Distributions
Qualified distributions from a Roth IRA are not subject to federal income tax.   Distributions are qualified if they are made:

• After a five-year waiting period;¹⁷
• After the taxpayer reaches 59 1/2;
• Due to the taxpayer’s death
• Because the taxpayer becomes disabled; or
• To pay for qualified first-time home buyer expenses.¹⁸

Distributions which are not qualified are subject to tax.  Amounts withdrawn are first considered to come from nondeductible contributions and conversion amounts (all Roth IRAs are aggregated from this calculation) and are not subject to tax.   After all regular contributions have been withdrawn, any conversion contributions would be next in order, remaining amounts are considered to be income earned within the IRA and, if withdrawn, are taxable.  If taxable distributions are received prior to age 59 ?, a 10% penalty tax may be added.¹⁹

A taxpayer who converted a traditional IRA to a Roth IRA in 1998 could have elected to recognize any taxable income from the conversion ratable, over a four-year period.  If such a taxpayer withdraws amounts from the Roth IRA prior to year 2001, however, the benefits of any remaining deferral will be lost and recognition of any remaining, unrecognized income will be accelerated, up to the amount of the distribution allocable to the 1998 conversion.²⁰

Other Differences
There are several other significant differences between the traditional IRA and the Roth IRA.

• Contributions after age 70 1/2:  Unlike the traditional IRA, contributions to a Roth IRA may be made even after the taxpayer has reached 704 1/2, as long as the taxpayer has compensation.
• Distribution requirements:  Roth IRAs are not subject to the mandatory distribution requirements during the life of the owner (triggered at age 70 1/2), which apply to traditional IRAs.

Factors Favoring Conversion to a Roth IRA
Factors which would favor converting an existing traditional IRA to a Roth IRA include the following:

• The dollar amount in an existing IRA is relatively small.
• The majority of contributions in an existing IRA consist of nondeductible contributions.
• A taxpayer has a least five years before withdrawals are planned
• A taxpayer anticipates that the funds in an IRA will not be needed at retirement and would like to continue tax-free growth for as long as possible.
• Sufficient non-IRA funds are available to pay the additional income tax due as a result of the conversion from a traditional IRA to a Roth IRA
• It is anticipated that a taxpayer’s marginal tax bracket during retirement will be the same as, or higher than, the current marginal bracket.

Investment Alternatives

• Banks and savings and loans:  Certificates of deposits are generally insured by the FDIC.  Fixed and variable rates are available.  There may be stiff penalties for early withdrawal.
• Annuities:  Traditional, fixed individual retirement annuities issued by life insurance companies can guarantee fixed monthly income at retirement and may include a disability wavier of premium provision.  Variable annuities do not guarantee a fixed monthly income at retirement.
• Money market:  Yield fluctuates with the economy.   Investor cannot lock in higher interest rates.  It is easy to switch to other investments.
• Mutual funds:  A wide variety of mutual funds with many investment objectives are available.
• Zero coupon bonds:  Bonds are issued at a deep discount from face value.  There are no worries about reinvesting interest payments.  Zero coupon bonds are subject to inflation risk and interest rate risk.
• Stocks:  A wide variety of investments (and risks) is possible.  Losses are not deductible.
• Limited partnerships:  Some limited partnerships are especially designed for qualified plans, specifically in the areas of real estate and mortgage pools.

Prohibited Investments or Transactions

• Life insurance:  Roth IRAs cannot include life insurance contracts.
• Loans to IRA taxpayer:  Self-borrowing triggers a constructive distribution of the entire amount in an IRA.
• Collectibles:  Purchase of art works, antiques, metals, gems, stamps, etc., will be treated as a taxable distribution.  Coins are issued under state law and certain U.S. gold, silver and platinum coins are exceptions.  Certain kinds of bullion may be purchased.

Other Factors to Consider

• Is the interest rate fixed or variable?  If interest rates drop, a fixed rate may be better, especially if you can make future contribution at the same fixed rate.  If interest rates go up, you may be able to roll the account to another Roth IRA.
• What is the yield?  More frequent compounding will produce a higher return?
• How often can you change investments? Is there a charge?

Back to Top

Is a Variable Annuity Right For Me?

The term “annuity” derives for a Latin term meaning “annual” and generally refers to any circumstances where principal and interest are liquidated through a series of regular payments made over a period of time.  A tax-deferred annuity is an annuity in which taxation of interest or other growth is deferred until it is actually paid.²¹

A commercial²², tax-deferred annuity is a contract between an insurance company and a contract owner.  In a typical situation, the contract owner contributes funds to the annuity.  The money put into the contract is then allowed to grow for a period of time.  At a future date, the contract may be annuitized and the accumulated funds paid out, generally through periodic payments made over either a specified period of time, or the life of an individual or the joint lives of a couple.

A variable annuity is a type of annuity in which the contract owner directs the overall investment strategy for the funds placed in the contract.²¹

Fixed vs. Variable Annuities
Two primary annuity types are fixed and variable annuities.  Although these annuities share many features in common, the key differences between them arise from the means used to grow the funds contributed by the contract owner.

• Fixed Annuities:  Fixed annuities are characterized by a minimum interest rate guaranteed by the issuing insurance company.  Typically, a minimum annuity benefit is also guaranteed.  The funds contributed to the contract by the annuity owner are placed in the insurance company’s general account, and the investment risk involved rests entirely on the insurance company.  With a fixed annuity, the focus is on safety of the principal and stable investment returns.
• Variable Annuities:  In contrast, a variable annuity contract has no guarantees as to investment return or annuity benefits.  The funds contributed by the contract owner are placed in special, variable annuity subaccounts.  Within these subaccounts, the annuity owner may choose to invest the funds in a wide variety of investment options.  Annuity benefits depend upon the investment results achieved, and the investment risk rests entirely on the contract owner.  With a variable annuity, the goal is to provide benefits which keep pace with inflation.

How a Variable Annuity Works
There are two distinct phases involved in the typical deferred variable annuity:

• Accumulation:  During the accumulation phases, the contract owner contributes funds to the contract through either a single lump sum, or a series of payments.  One hundred percent of contributions are invested in one or more subaccounts selected by the contract owner.  The cost of each accumulation unit is based on the market value of the investments underlying the subaccount, and the number of units outstanding.
• Annuitization:  When a contract owner decides to annuitize the contract, the accumulation units are exchanged for annuity units.  The number of annuity units received will depend on the price per unit, and certain insurance company assumptions regarding income, mortality and expenses.  Once determined, the number of annuity units remains constant.  The amount of periodic income payable is determined by multiplying the current value of each annuity unit, by the number of units.  As the value of each annuity unit increases or decreases, so does the periodic income.

Common Investment Options
Depending on the insurance company and the contract, a wide variety of investment options are often available to the buyer of a variable annuity:

• Stock:  The subaccount options which may be available can include aggressive growth, focusing on high risk/high return stocks; global and international stock, with equity investments from around the world; and specialty, emphasizing a particular industry or segment of the economy.
• Bonds:  May include subaccounts focusing on corporate bonds; government bonds; and global or international bonds from around the world.
• Balanced:  Includes a blend of stocks and bonds.
• Precious metals:  Some variable contracts will offer subaccount options involving precious metals, such as gold or silver, investing either directing in the metals themselves, or through equity or debt investments in mining companies.
• Money market:  Includes extremely high-quality short-term debt investments with an average maturity ranging from 30-120 days.
• Fixed account:  In this option, the insurer guarantees a specific rate of return, for a particular period of time.  Within a variable annuity contract, this is only the investment option where the investment risk rests on the insurer and not the contract owner.

Other Variable Annuity Contract Provisions
There are a number of key contract provisions which a buyer of a variable annuity contract should be aware of.  Among these are:

• How the contract is driven:  Some contracts are owner-driven while others are annuitant-driven.  The word “driven” refers to what happens when a specific party dies or becomes disabled.  With an owner-driven contract, the death of the annuitant will not terminate the contract.  Similarly, with an annuitant-driven contract, the death or disability of the contract owner will have no bearing on the contract, other than the substitution of new owners.
• Guaranteed death benefit:  If an annuitant dies before annuity payments begin, the contract will pay the named beneficiary the greater of the investment in the contract (less any withdrawals) or the contract value on the date of death.
• Enhanced death benefit:  Some variable annuities offer an enhanced death benefit option.  This feature provides that upon the death of the annuitant, the beneficiary will receive the greater of the account’s value on the date of death, or the original principal (plus any additions) compounded at 5% per year.  The ultimate death benefit is subject to the claims paying ability of the insurer.
• Exchange privilege:  Allows the contract owner to periodically change the allocation of funds among the subaccounts.  Such exchanges are usually allowed, often without charge, several times a year.
• Prospectus:  Variable annuities are considered by the Securities and Exchange (SEC) to be a security.  The SEC requires that the purchaser of a variable annuity to be given a prospectus, which provides detailed information on how the annuity contract works, the subaccounts available, the risks, and all expenses or charges involved.  The SEC also requires individuals selling variable annuities to be licensed to sell securities.

• Taxation of Annuity Payments
  The tax treatment of payments made from an annuity will vary, depending on where in the life cycle of the annuity the payments are made.  In general, the following rules apply:²³

  • Before annuitization:  Funds withdrawn from an annuity contract prior to annuitization  are considered to be made first from interest or growth.²⁴  These earnings are taxable as ordinary income.  If the annuity owner is under the age of 59 ? at the time a withdrawal is made, the earnings are also generally subject to a 10% IRS penalty.²⁵  If earnings are completely withdrawn, and payments are then made from the owner’s initial investment, the withdrawal is treated as a tax-free recovery of capital.
  • After annuitization:  Regular annuity payments are treated as being composed of part earnings, and part return of capital.  The earnings portion is taxable as ordinary income.  Once the owner has completely recovered his or her investment in the contract, all remaining payments are fully taxable as ordinary income.
  • Estate taxes:  Any amount payable to a beneficiary under an annuity contract by reason of an owner’s death is includable in the owner’s gross estate.  If an annuitant/owner receiving payments under a Life Only annuity contract dies, no further payments are due, and nothing is includable in his or her estate.

  Seek Professional Guidance
  Tax deferred annuities are primarily intended to be long-term investments.  Because of this, and because of the complexity of many annuity contracts, an individual considering the purchase of a tax deferred annuity should carefully consider all aspects before entering into the contract.  The advice and counsel of appropriate tax, legal, and financial planning advisors is highly recommended.

  Back to Top

  Has your current advisor discussed your risk comfort level recently? Call Capital Choice Advisors today or Click Here for more information!

  704-542-5499

  ---

  ¹ This amount applies to 2002-2004.  In 2005-2007 it will be $4,000 and in 2008 and thereafter it will be $5,000.  If an IRA participant is age 50 or older, he or she may contribute and deduct an additional $500 ($1,000 if the spouse is over age 50).  Beginning in 2006, this additional amount is increased to $1,000 ($2,000 if the spouse is also over age 50).

  ² This amount applies to 2002-2004.  In 2005-2007, it will be $8,000 and in 2008 and thereafter it will be $10,000.

  ³ 2003 limits.  For 2002 the phase-out ranges were (1) MFJ- AGI of $54,000 - $64,000; (2) single – AGI of $34,000 - $44,000 (3) MFS – AGI of $0 - $10,000.  These limits will increase annually until they reach an AGI of $80,000 - $100,000 for MFJ in 2007.  For single taxpayers, limits will increase to an AGI of $50,000 - $60,000 in 2005.  The phase-out range for individuals with the MFS filing status will remain an AGI of $0-$10,000.

  ⁴ Note that not all exceptions to the 10% penalty are listed.

  ⁵ Based on federal law.  State law may vary.

  ⁶ See Treas. Reg. Sec. 1.401(a)(9)-5, Q&A4(a)

  ⁷ Taxes and penalties do not apply to nondeductible contributions

  ⁸ Or, if later, by the end of the calendar year following the year the participant died.

  ⁹ Income tax treatment of Roth IRAs at the state level may differ.

  ¹⁰ See IRC Reg. 1.408A-4, Q & A7

  ¹¹ The 10% penalty will apply to the extent that converted amounts would have been included in income because of the conversion.  See IRC Sec. 408A(d)(3)(F)

  ¹² Converted amounts are not included in determining if AGI is $100,000 or less.  The converted amounts are, however, taken into account for all other income tax purposes.

  ¹³ For example, a taxpayer may find, after the close of the tax year that AGI exceeded $100,000

  ¹⁴ See IRC Reg. 1.408A-5, Q&A9

  ¹⁵ See IRC Reg. 1.408A-5, Q&A1

  ¹⁶ These amounts apply to 2002-2004.  Also, if an IRA participant is 50 or older, he or she may contribute an additional $500 ($1,000 if the spouse is also over age 50).

  ¹⁷ Five years after a contribution is first made, or amounts converted to, a Roth IRA.  Subsequent contributions or conversions do not start a new five-year waiting period.  See IRC Sec. 408A(d)(2)(B), as amended by the Internal Revenue Restructuring and Reform Act of 1998.

  ¹⁸ Limited to $10,000, which must be used within 120 days of withdrawal.  Distribution must be used to acquire or rebuild a first home of the taxpayer, spouse or any descendent or ancestor of the taxpayer or spouse.

  ¹⁹ Penalty tax will be assessed unless certain exceptions apply.

  ²⁰ See IRC Sec 408A(d)(3)(E)(i), as added by the Internal Revenue Restructuring and Reform Act of 1998.

  ²¹ Under federal law, the deferral of income tax on growth inside the contract is available only to natural persons; the tax –deferral is generally not permitted if the annuity owner is a non-natural person such as a trust or corporation.

  ²² A private annuity is an agreement between individuals, usually exchanging a valuable asset (such as a business) for a lifetime income.  The party promising to pay the annuity is someone who is not in the business of issuing annuities.

  ²³ This information is based on federal law.  State law may vary.

  ²⁴ For annuity contracts entered into prior to August 14, 1982, withdrawals are treated as first coming from principal.

  ²⁵ Two exceptions to the 10% penalty involve the death or disability of the contract owner or annuitant, depending on the wording of the contract.