Investors have two options for their individual retirement accounts (IRAs). The first option is a traditional IRA, the second option is a Roth IRA (named for the account's congressional sponsor), which features -- among other benefits -- the ability to accumulate tax-free earnings under certain circumstances. In this report we'll discuss the features of the traditional IRA. You may want to review material outlining the Roth IRA -- or talk to your financial planner -- before you make a decision as to which IRA is right for you.

What Is a Traditional IRA?

An individual retirement account allows your investment earnings to grow tax deferred until withdrawn, typically at retirement. Generally, if you have earned income or receive alimony, you can establish as many IRA accounts as you want prior to the tax year in which you reach age 70½. You may also have an IRA even if you participate in a qualified pension, profit-sharing, or other retirement plan. Your entire contribution may not be deductible on your income tax return, depending on your income.

IRAs offer two distinct advantages in terms of taxes: potential deductibility of contributions and tax deferral on investment earnings.

Rules on Contribution Limits

In 2008, the annual contribution limit rose to $5,000 (in general, married couples filing jointly can contribute a total of $10,000, even if only one spouse has income). Thereafter, the contribution limit will be adjusted for inflation. Individuals aged 50 and older are now able to take advantage of new "catch-up" contributions to IRAs. The allowable catch-up contribution is $1,000 per year.

In addition, you can open an IRA or make contributions to an existing IRA as late as the deadline for filing a tax return for that year. That means you would have until April 2009, to make your 2008 IRA contribution.

Tax Treatment of IRAs

Contributions to an IRA may or may not be deductible from your earned income in a given tax year depending on your situation. Income limits apply if either you or your spouse participate in an employer-sponsored retirement savings plan. Deductibility is phased out over certain ranges of income as follows:

IRA Deductibility Phaseout Ranges*

$ in Thousands	2007		2008
	Single Filers	Joint Filers	Single Filers	Joint Filers
Those covered by an employer-sponsored retirement plan	$52-$62	$83-$103	$53-$63	$85-$105
Those not covered by an employer-sponsored retirement plan, but filing a joint return with a spouse who is covered	N/A	$156-$166	N/A	$159-$169
*Based on modified adjusted gross income (MAGI).

The Magic of Tax-Deferred Compounding

The ability to make tax-deductible contributions to your IRA can help your current tax situation. But you may want to invest in an IRA whether or not your contributions are deductible. Why? The real advantage of investing in an IRA is tax-deferred compounding of your investment earnings over the long term.

For example, if you had contributed $100 every month for 30 years to a tax-deferred IRA, then paid 25% tax on your withdrawals at retirement, you could have netted $112,522, assuming an 8% average annual rate of return. However, in an account that's taxed annually at a hypothetical rate of 25%, your total would have been only $100,954 -- almost $12,000 less just because you had to pay taxes up front!¹

As you evaluate the potential benefits of an IRA, consider the advantage of tax deferral. This chart shows the result when a hypothetical $100 monthly investment is made for 30 years in a tax-deferred plan versus the same investment taxed annually at a hypothetical rate of 25%, assuming an 8% average rate of return compounded monthly. If the final tax deferred amount is withdrawn at retirement and taxed at a hypothetical rate of 25%, it exceeds the taxable final amount by nearly $12,000.

Change Jobs, But Keep Your Retirement Money

IRAs can also come in handy when you're about to leave jobs and need to move your 401(k) money. If your former employer requires that you withdraw your retirement money, you can move your distribution safely from your former employer's qualified retirement plan into a rollover IRA and avoid owing current income tax on the distribution.

If you choose to physically receive part or all of your money and do not replace the entire amount within 60 days, you will be subject to penalty fees and taxes on the amount kept. Clearly, you can avoid many headaches and keep your retirement nest egg intact by making sure your hands never touch your retirement money until age 59½.

Withdrawing From Your IRA

Generally, any distribution you receive from an IRA before the day you reach age 59½ is subject to a 10% penalty tax imposed by the IRS, in addition to federal and state income tax. Beginning at age 59½, you can withdraw money (of which any deductible contributions and investment earnings are taxable at your then-current income tax rate) from your IRA as desired without penalty, whether or not you are still employed.

But, as with any rule, there are exceptions. Distributions before age 59½ are not subject to the penalty tax under certain circumstances, including when:

• You become permanently disabled.
• You die before age 59½ and distributions are made to your beneficiary or estate after your death.
• You make withdrawals to pay deductible medical expenses that exceed 7.5% of your adjusted gross income.
• You make withdrawals for a qualified first-time home purchase (lifetime limit of $10,000).
• You make withdrawals to pay qualified higher education expenses for yourself, a spouse, children, or grandchildren.

By April 1 following the year in which you reach age 70½, you must begin withdrawals from your IRA. A great advantage of taking only the required minimum distribution amount is that the balance continues to compound tax deferred. However, if your distributions in any year after you reach age 70½ are less than the required minimum, you will be subject to a penalty tax equal to 50% of the difference.

Consult Your Financial Advisor

An IRA can become the cornerstone of your personal retirement savings program, providing the foundation for your financial security. That's why it is so important to start planning today. Consult with your financial advisor to help you determine how an IRA could help make your financial future more secure.

Points to Remember

1. If you have earned income or alimony, you can establish as many IRA accounts as you want prior to the tax year in which you reach age 70½.
2. Contribution limits are $5,000 or 100% of your earned income, whichever is less. Special "catch-up" contributions are also available to older Americans.
3. You can open an IRA or make contributions to an existing IRA as late as the tax-filing deadline for that year.
4. Income limits restricting the deductibility of contributions apply if either you or your spouse participate in an employer-sponsored retirement savings plan.
5. A major advantage of investing in an IRA is tax-deferred compounding.
6. By April 1 following the year in which you reach age 70½, you must begin withdrawals from your IRA.
7. Individuals under the age of 59½ can make penalty-free withdrawals to pay college expenses for themselves, a spouse, children, or grandchildren.

¹This example is hypothetical in nature and is not indicative of future performance in your retirement plans.

This information is intended to be educational in nature and should not be considered legal, tax, or financial advice. Because no investment strategy, including asset allocation and diversification, can completely eliminate risk, it's important to discuss your personal financial goals and risk tolerance with a financial advisor to map out a course that's right for you.

© 2009 Standard & Poor's Financial Communications. All rights reserved.

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If you have assets in a qualified retirement plan, such as a company-sponsored 401(k) plan or a traditional Individual Retirement Account (IRA), you'll want to be aware of several rules that may apply to you when you take a distribution.

Required Minimum Distributions During Your Lifetime

Many people begin withdrawing funds from qualified retirement accounts soon after they retire in order to provide annual retirement income. These withdrawals are discretionary in terms of timing and amount until the account holder reaches age 70½. After that, failure to withdraw the required minimum amount annually may result in substantial tax penalties. Thus, it may be prudent to familiarize yourself with the minimum distribution requirements.

For traditional IRAs, individuals must begin taking required minimum distributions no later than April 1 following the year in which they turn 70½. The same generally holds true for
401(k)s and other qualified retirement plans. (Note that some plans may require plan participants to remove retirement assets at an earlier age.) However, required minimum distributions from a 401(k) can be delayed until retirement if the plan participant continues to be employed by the plan sponsor beyond age 70½ and does not own more than 5% of the company.

In 2002, the IRS issued final regulations that greatly simplify the calculation of required minimum distributions. Now, minimum distributions are determined using one standard table based on the IRA owner's/plan participant's age and his or her account balance. Thus, required minimum distributions generally are no longer tied to a named beneficiary. There is one exception, however. IRA owners/plan participants that have a spousal beneficiary who is more than 10 years younger can base required minimum distributions on the joint life expectancy of the IRA owner/plan participant and spousal beneficiary.

These minimum required distribution rules do not apply to Roth IRAs. Thus, during your lifetime, you are not required to receive distributions from your Roth IRA.

Additional Considerations for Employer-Sponsored Plans

The table below is general in nature and not a complete discussion of the options, advantages, and disadvantages of various distribution options. For example, there are different types of annuities, each entailing unique features, risks, and expenses. Be sure to talk to a tax or financial advisor about your particular situation and the options that may be best for you.

Employer-Sponsored Retirement Plan Distribution Alternatives1
	Method	Advantages	Disadvantages
Annuity	A regular periodic payment, usually of a set amount, over the lifetime of the designated recipient. (Not available with some plans.)	Assurance of lifetime income; option of spreading over joint life expectancy of you and your spouse.2	Not generally indexed for inflation.
Periodic Payments	Installment payments over a specific period, often 5 - 15 years.	Relatively large payments over a limited time.	Taxes may be due at highest rate.
Lump Sum	Full payment of the monies in one taxable year.	Direct control of assets; may be eligible for 10-year forward averaging.	Current taxation at potentially highest rate.
IRA Rollover	A transfer of funds to a traditional IRA (or Roth IRA if attributable to Roth 401(k) contributions).	Direct control of assets; continued tax deferral on assets.	Additional rules and limitations.

In addition to required minimum distributions, removing money from an employer-sponsored retirement plan involves some other issues that need to be explored. Often, this may require the assistance of a tax or financial professional, who can evaluate the options available to you and analyze the tax consequences of various distribution options.

Lump-Sum Distributions.

Retirees usually have the option of removing their retirement plan assets in one lump sum. Certain lump sums qualify for preferential tax treatment. To qualify, the payment of funds must meet requirements defined by the IRS:

• The entire amount of the employee's balance in employer-sponsored retirement plans must be paid in a single tax year.

• The amount must be paid after you turn 59 ½ or separate from service.

• You must have participated in the plan for five tax years.

A lump-sum distribution may qualify for preferential tax treatment if you were born before January 2, 1936. For instance, if you were born before January 2, 1936, you may qualify for 10-year forward income averaging on your lump-sum distribution, based on 1986 tax rates. With this option, the tax is calculated assuming the account balance is paid out in equal amounts over 10 years and taxed at the single taxpayer's rate. In addition, you may qualify for special 20% capital gains treatment on the pre-1974 portion of your lump sum.

If you qualify for forward income averaging, you may want to figure your tax liability with and without averaging to see which method will save you more. Keep in mind that the amounts received as distributions are generally taxed as ordinary income.

To the extent 10-year forward income averaging is available, the IRS also will give you a break (minimum distribution allowance) if your lump sum is less than $70,000. In such cases, taxes will only be due on a portion of the lump-sum distribution.

If you roll over all or part of an account into an IRA, you will not be able to elect forward income averaging on the distribution. Also, the rollover will not count as a distribution in meeting required minimum distribution amounts.

Periodic Distributions.

If you choose to receive periodic payments that will extend past the year you turn age 70 ½, the amount must be at least as much as your required minimum distribution, to avoid penalties.

Uniform Lifetime Table for Required Minimum Distributions
Age	70	75	80	85	90	95	100	105
	27.4	22.9	18.7	14.8	11.4	8.6	6.3	4.5

This table shows required minimum distribution periods for tax-deferred accounts for unmarried owners, married owners whose spouses are not more than 10 years younger than the account owner, and married owners whose spouses are not the sole beneficiaries of their accounts.³

Other Considerations.

If your plan's beneficiary is not your spouse, keep in mind that the IRS will limit the recognized age gap between you and a younger nonspousal beneficiary to 10 years for the purposes of calculating required minimum distributions during your lifetime.

Conclusion

There are several considerations to make regarding your retirement plan distributions, and the changing laws and numerous exceptions do not make the decision any easier. It is important to consult competent financial advisors to determine which option is best for your personal situation.

Points to Remember

1. Distributions from a 401(k) can be delayed until retirement if a plan participant is still employed by the plan sponsor beyond age 70 ½ and if the plan participant does not own more than 5% of the company.

2. After age 70½, failure to withdraw the required minimum amount annually may result in substantial tax penalties.

3. A lump-sum distribution may qualify for 10-year forward income averaging.

4. The IRS will give you a break (minimum distribution allowance) if your lump sum qualifies for 10-year forward averaging and is less than $70,000.

5. You may be able to accelerate or minimize the disbursement of your retirement assets by how you choose to calculate periodic payment time periods.

1	Speak to a tax or financial advisor about your alternatives before making a decision.
2	Annuity guarantees are backed by the claims-paying ability of the issuing company.
3	Source: IRS Publication 590.

This information is intended to be educational in nature and should not be considered legal, tax, or financial advice. Because no investment strategy, including asset allocation and diversification, can completely eliminate risk, it's important to discuss your personal financial goals and risk tolerance with a financial advisor to map out a course that's right for you.

© 2009 Standard & Poor's Financial Communications. All rights reserved.

TRM31561