Waddell & Reed

Individual Retirement Accounts (IRA)

Take control of your retirement future by investing in an IRA now. An IRA may serve as your primary retirement savings vehicle or as a supplement to a 401(k) or other employer-sponsored program. With tax advantages including tax-free and tax-deferred withdrawals, an IRA can help put you on the road to a comfortable retirement.

What is a Traditional IRA?

Investing in a Traditional IRA personal savings plan is one way to provide yourself supplemental retirement income and reduce your dependence on Social Security benefits.

Traditional IRA Benefits
Many investors are drawn to the tax benefits that a Traditional IRA offers. However, other benefits also can make a Traditional IRA a good choice.

  • Tax Deferment and Deduction - In addition to deferring taxes on current investment income or appreciation, you may be able to deduct all or a portion of your annual contribution, depending on your adjusted gross income (AGI) as figured for your tax filing.
  • Contribution Opportunities - The current maximum contribution is $5,500, with an additional $1,000 for those age 50 and over. You also may contribute for a non-working or minimally working spouse.
  • Reinvestment of Earnings - All earnings from your Traditional IRA automatically are reinvested into your account to maximize your total return.
  • Investment Flexibility - Waddell & Reed offers a wide variety of mutual funds to fit your retirement planning needs.
  • Non-Working Employee or Spouse Tax Deductions - An employee or spouse who is not covered by a qualified retirement plan can fully deduct (subject to certain income limitations) Traditional IRA contributions.

Traditional IRA Deductions At A Glance
If you are covered by a qualified retirement plan, you may deduct up to the amounts shown below, based on annual Adjusted Gross Income (AGI):

Year Full Deduction if AGI is Below Reduced Deduction if AGI is Between No Deduction if AGI is at or Above
2016 $98,000 Joint $98,000-$117,999 Joint $118,000 Joint
$61,000 Single $61,000-$70,999 Single $71,000 Single

If the IRA account holder is not an active participant in a retirement plan at work, but their spouse is an active plan participant in their employer’s retirement plan, the IRA contribution may be deductible based on the following adjusted gross income limits:

Year Full Deduction if AGI is Below Reduced Deduction if AGI is Between No Deduction if AGI is at or Above
2016 $184,000 $184,000-$193,999 $194,000

Substantially Equal Periodic-Payments(SEPP)
A Substantially Equal Periodic-Payment Plan is a plan that allows individuals who have invested in an IRA or another qualified retirement plan to withdraw funds prior to the age of 59½ and avoid early-withdrawal penalties. Typically, an individual who removes assets from a plan prior to age 59½ will face taxes on any income generated by the fund - interest income or capital gain - and on pre-tax contributions, while also being subject to a 10% penalty. With this option, the funds are accessed using the SEPP plan which pays the individual annual distributions for five years or until he or she turns 59½, whichever comes last, and does not subject the individual to the 10% early-withdrawal penalty.

Under Revenue Ruling 2002-62 the IRS provides three basic methods in which payments will be considered to be substantially equal periodic payments. Two of the acceptable methods allow the use of a reasonable interest rate. The IRS mandates that "the interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins." The following figures represent 120% of the most recent federal mid-term rate.

120% of the Federal Mid-Term Rate
July 1.71%
August 1.43%

For additional information regarding a Traditional IRA or a SEPP Plan please consult your Waddell & Reed financial advisor.

What is a Roth IRA?
A Roth IRA offers you the potential for tax-free distributions at retirement. While you must have earned income to contribute to a Roth, and contributions are not tax deductible, you won't pay federal taxes on dividends or capital gains you have earned if you have a qualified distribution.

Roth IRA Benefits
A Roth IRA is an attractive choice to many investors.

  • Tax-free Earnings - You can begin taking tax-free and penalty-free withdrawals of Roth earnings at age 59 ½ if your account is at least five years old.
  • Save Taxes on Investment Income - A Roth IRA allows you to save taxes on your investments over the years by sheltering annual growth and investment income.
  • Contribution Opportunities - Contribute up to the maximum of $5,500 per year. If you're 50 or older, you can make an additional $1,000 catch-up contribution.
  • Spousal Contributions - Depending on your annual Adjusted Gross Income (AGI), you may make a nondeductible contribution of up to $5,500 to a Roth IRA for a non-working spouse, subject to joint-filer tax and earned income limits.
  • Early Withdrawal Option - You may take nontaxable withdrawals before age 59½ if the Roth IRA is held for at least five years and you meet certain distribution guidelines. Otherwise, an early withdrawal before age 59 ½ may be subject to taxes and a 10 percent penalty.

Roth IRA Contribution Limits

Year Filing Status Roth IRA Adjusted Gross Income Limits
2016 Single filer $117,000-$132,000
Joint filers $184,000-$194,000
Married filing single $10,000
Feature Traditional IRA Roth IRA
Contribution Limits 100 percent of earned income. Up to:
  • $5,500 – single filers
  • $11,000 – joint filers
100 percent of earned income. Up to:
  • $5,500 – single filers.
  • $11,000 – joint filers.
Catch-up Contribution Provision Up to $1,000 for individuals age 50 and over. Up to $1,000 for individuals age 50 and over.
Eligibility Under age 70½ and employed Any age when single and joint tax filers fall under certain AGI limits.
Deductibility Fully deductible if not an active participant in a qualified retirement plan (certain AGI limits may apply to joint filers). Reducing deduction available for active participants in qualified retirement. Nondeductible.
  • Before age 59½. Taxed as ordinary income. Ten percent penalty does not apply if used for certain distributions, such as: death, permanent disability, qualified higher education expenses or a qualified first-home purchase.*
  • After age 59½. Deductible contributions – and any earnings – taxed as ordinary income.
  • Must begin taking required minimum distributions at age 70½.
  • Before age 59½. Tax free if Roth IRA held at least five years and distribution is due to: death, permanent disability, qualified education or a qualified first- home purchase.
  • Any taxable (non qualified) distributions: Taxed as ordinary income, but 10 percent penalty does not apply if used for certain distributions, such as qualified higher-education expenses or qualified first-home purchase.
  • After age 59½. Tax free if Roth IRA held at least five years.
  • Required minimum distributions are not required at age 70½

* A nonqualified early withdrawal before age 59 ½ may be subjected to tax and a 10 percent penalty as set by federal law.

What is a Stretch IRA?

A Stretch IRA is a beneficiary-naming strategy for transferring your wealth across generations. A savvy and straightforward investment savings concept, the Stretch IRA literally "spreads the wealth" to others, providing you peace of mind and your beneficiaries an added source of income.

Stretch IRA Benefits

  • Allow your beneficiary to take maximum advantage of your IRA's valuable tax-deferred earnings potential for a longer period of time.
  • May lower annual income tax liability because the distributions are based on the beneficiary's life expectancy, which typically is longer than that of the original IRA holder.
  • Name any person or any entity as your beneficiary, though a beneficiary younger than you allows the IRA to stretch for a longer period of time.

How to Stretch Your Legacy
Consider this example:

This hypothetical example is for illustration purposes only and does not represent the past or future performance of any specific investment vehicle. The example does not reflect the volatility that can occur in an equity-based account and does not reflect fees, inflation or state and local taxes.


  • Initial investment - $250,000
  • Based on a 6 percent annual return
  • Reinvestment of income and capital gains
  • Based on 20 percent federal income tax rate
  • All distributions taken at the end of the year


  • Total Distribution - $1,250,570
  • Federal Taxes Paid - $250,114
  • Total Distribution After Taxes - $1,000,456
  • Years in Distribution - 45

Roth Conversions
For some investors, a Roth IRA may provide greater after-tax income during retirement than a Traditional IRA. While converting to a Roth is a taxable event, the benefits may outweigh the tax consequences for many. Additionally, tax laws that previously prevented higher-net-worth investors from converting to a Roth have changed. Regardless of your annual income or tax-filing status, you can convert a Traditional IRA to a Roth.

You also can convert your SEP or SIMPLE IRA to a Roth, or roll over funds from an eligible employer retirement plan, such as a 401(k). Your Waddell & Reed financial advisor can discuss Roth conversions with you in more detail.

Roth Conversion Benefits

  • Tax-free Withdrawals During Retirement - Any qualified withdrawals from a Roth IRA during retirement are tax free.
  • Protection Against Future Tax-Rate Changes - Because you don't pay taxes on Roth withdrawals in retirement, you may avoid the risk of future tax-rate changes.
  • Tax Diversification - One strategy for retirement investing is to incorporate tax diversification - taxable, tax deferred and tax free - to your portfolio. Converting your Traditional IRA to a Roth is one way to achieve the tax-free income component.
  • Withdrawal Flexibility – You don't have to take a required minimum distribution on a Roth IRA at age 70 ½. And, you can continue to contribute to your Roth as long as you have earned income.
  • Legacy Planning – Unlike a Traditional IRA, a Roth IRA allows you to potentially leave a tax-free asset to your heirs. A Traditional IRA will be taxable at your beneficiary's marginal income-tax rates.

Before converting, consider:

  • Current and future income tax rates.
  • Current age and life expectancy.
  • Ability to pay the taxes due on a conversion from a source other than your IRA.
  • Anticipated spending needs during retirement.
  • Other sources of retirement funds and retirement income - pre-tax and post-tax.
  • Age and life expectancy of beneficiary(ies).
  • Type of contributions made – deductible and/or nondeductible - and IRS rules governing partial conversions.

Special Recharacterization Provision
After you convert you may revert back to a Traditional IRA. Known as recharacterization, the transaction must be processed by October 15 of the year following the year of the conversion.

A Roth conversion might not be a favorable strategy if any of the following apply:

  • You are unable to pay the tax bill for the Roth conversion from a source outside of your IRA.
  • You are nearing or are in retirement and intend to fund all or a large portion of your retirement income with your pre-tax retirement savings.
  • You feel your tax bracket is likely to drop during your retirement years.
  • The conversion will put you in a higher tax bracket. If this is the case, you might consider a partial conversion.
  • You have named a tax-exempt charity as beneficiary of your IRA.

Roth conversion analysis is complex. You may want to consult with your tax advisor as well as your financial advisor.

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