IRAs and Coverdell ESAs (Education Savings Account)


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Choose the IRA that meets your needs.

Learn your IRA options using this quick reference to Traditional IRAs, Roth IRAs and Coverdell ESAs (Education Savings Account)

The chart below highlights the details and advantages of the accounts. If you are eligible to contribute to both a Traditional IRA and a Roth IRA and are still unsure which account is right for you, follow these general rules-of-thumb:

Choose a Roth IRA if you don't need the tax break right now. It's a more flexible investment because:

You can withdraw regular contributions at any time, tax-free and penalty-free
You do not have to take mandatory distributions at age 70 1/2.

Choose a Traditional IRA if you want the tax deduction right now. It also makes sense if you anticipate paying taxes at a significantly lower rate in retirement.

Also remember, Coverdell ESAs offer tax-free distributions and, unlike section 529 plans, can be used for elementary and high school expenses at most public, private and parochial schools.

Comparing Your IRA Options
	Roth IRA	Traditional IRA	Coverdell ESA (Education Savings Account)
Who can contribute?	Anyone who has income from compensation (or who is filing jointly with a spouse who earns compensation), with the following MAGI:* Up to $95,000 for single filers Up to $150,000 for joint filers Reduced contributions allowed for higher incomes: Up to $110,000 for single filers Up to $160,000 for joint filers	Anyone under age 70 1/2 who has income from compensation (or who is filing jointly with a spouse who earns compensation). Anyone who has received a distribution from a qualified retirement plan and decides to move the proceeds of the plan into an IRA.	Anyone who has MAGI: Up to $95,000 for single filers Up to $190,000 for joint filers Some people with higher MAGI may be able to make smaller contributions Contributions not allowed after the beneficiary reaches age 18 (except for special needs beneficiaries)
How much can I contribute?	You may be able to contribute up to: $4,000 for 2006 and 2007 $5,000 for 2008 - 2010 For owners age 50 and older, you may be able to contribute up to: $5,000 for 2006 and 2007 $6,000 for 2008 - 2010	You may be able to to contribute up to: $4,000 for 2006 and 2007 $5,000 for 2008 - 2010 For owners age 50 and older, you may be able to contribute up to: $5,000 for 2006 and 2007 $6,000 for 2008 - 2010	$2,000 per child each year Limit applies to all Coverdell ESAs for the same child
Who can make deductible contributions?	No one can deduct contributions	Fully-deductible contributions: Single individuals not active in employer retirement plans Single individuals active in employer retirement plans with MAGI* of less than: - $50,000 (2006 - 2010) Married couples with neither spouse active in an employer retirement plan Married individuals active in employer retirement plans with joint tax returns showing MAGI* of less than: -$75,000 (2006) -$80,000 (2007 - 2010) Married individuals not active in employer retirement plans with spouses who are, as long as MAGI* is $150,000 or less	No one can deduct contributions
What are the tax advantages?	Earnings are tax-deferred and withdrawals are tax-free if the account is open for five tax years and withdrawals are for a qualified reason (age 59 1/2, disability, death, or a first-time home purchase**) Not required to start withdrawals at age 70 1/2	Earnings grow tax-deferred until withdrawn Contributions may be tax-deductible	Withdrawals for certain qualified education expenses are tax-free Qualified education expenses include tuition, fees, books, computer equipment and technology required for elementary, secondary and post-secondary education A beneficiary may receive tax-free distributions from a Coverdell ESA in the same year he or she claims the Lifetime Learning or HOPE Scholarship tax credits
When can I withdraw without restrictions?	Regular contributions can be withdrawn tax-free and penalty-free at any time After the account has been open five tax years, earnings can be withdrawn tax-free and penalty-free for any of these reasons: age 59 1/2, disability, death or a first-time home purchase**	Withdraw penalty-free for any of the following reasons: Qualified higher-education expenses First-time home purchase** Age 59 1/2 Disability Qualifying medical expenses exceeding 7.5% of adjusted gross income Payment to beneficiaries upon the owner's death Payment of health insurance premiums while unemployed for 12 weeks or longer	Withdrawals are tax-free and penalty-free only for qualified education expenses (earnings are subject to tax and penalty for most other withdrawals) Funds can be transferred from one child's account to an account for another child in the family
Not intended as tax advise. Please consult a tax professional. Please read our IRA Shares and IRA Share Certificate disclosures. MAGI=Modified Adjusted Gross Income from the federal tax form *Lifetime limit for exemption on first-time home purchase is $10,000.

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