Know your IRA options

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The right choice for the long term

^®

Know your IRA options

Traditional IRA or

Roth IRA?

It’s your choice. There’s

an IRA for everyone.

This brochure will help you

determine which one may

be right for you.

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What will your retirement look like?

Will you be traveling, enjoying quality time with

family, volunteering for a favorite cause or

maybe pursuing a second career?

Regardless of what you’d like to be doing

in retirement, investing in an individual

retirement account (IRA) can help you

move closer to your goals.

Let’s get started

There are two types of IRAs to consider:

traditional and Roth. In three easy steps you’ll be

able to evaluate which IRA may be best for you.

Step 1: Determine your IRA eligibility

Step 2: Compare your IRA options

Step 3: Review your financial circumstances

This material was not written for and is not intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax law. Each taxpayer should seek advice from an independent tax adviser based on the taxpayer’s particular circumstances.

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Step 1 | Determine your IRA eligibility

Traditional or Roth? Or both?

An IRA gives you the opportunity to save for retirement and receive special tax privileges. There are two types of IRAs — traditional and Roth — each with its own rules and benefits. The first step in choosing the one that’s right for you is knowing which one(s) you’re eligible to contribute to.

Anyone who earns income through employment can open a traditional IRA. Whether you qualify for a Roth IRA or can deduct contributions to a traditional IRA will depend on your tax-filing status and your modified adjusted gross income (MAGI).

The table on the left shows whether you qualify for a tax deduction should you choose to contribute to a traditional IRA. The table on the right shows how much you can contribute to a Roth IRA, if you’re eligible, depending on your income.

Contributions to a Roth IRA aren’t tax-deductible. Both tables take into account your spouse’s income, if applicable.

Eligible for both? You can contribute to both a traditional and a Roth IRA as long as the combined amount does not exceed the applicable annual contribution limits shown on page 2. Married and filing separately? If so and your MAGI is less than

$10,000, you can make a partially deductible contribution to a traditional IRA (if you and/or your spouse are covered by a retirement plan) or a partial contribution to a Roth IRA (regardless of whether you’re covered by a plan).

Married and not covered by a plan? If neither you nor your spouse participates in a retirement plan at work, you can make a fully deductible contribution to a traditional IRA regardless of your filing status or income. Visit www.IRS.gov and see IRS Publication 590 for more information.

Your MAGI is calculated by subtracting any unreimbursed business expenses and allowable adjustments (such as deductible IRA contributions or alimony payments) from your gross income. To determine your MAGI, find your adjusted gross income (AGI) from your last tax return and ask your tax adviser how it may be changed or modified by certain losses or deductions.

Traditional IRA

2011 tax deductibility

Tax-filing status/MAGI Your deductibility status Filing single — you are covered by a retirement plan at work

$56,000 or less Fully deductible

$56,001–$65,999 Partially deductible

$66,000 or more Nondeductible

Filing single — you are not covered by a plan at work

All MAGI amounts Fully deductible

Filing jointly — you are covered by a plan at work

Filing jointly — only your spouse is covered by a plan at work

Roth IRA

2011 contribution eligibility

Tax-filing status/MAGI How much you can contribute Filing single

$107,000 or less Full contribution amount

$107,001–$121,999 Partial contribution amount

$122,000 or more Not eligible

Filing jointly

$169,000 or less Full contribution amount

$169,001–$178,999 Partial contribution amount

$179,000 or more Not eligible

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Step 2 | Compare your IRA options

Take the next step

Once you know which IRA(s) you’re eligible to open, consider which one(s) may be the best for you. The table on page 3 can help you evaluate your choices.

Know your limits*

Year If you’re younger than 50 If you’re 50 or older

2010 $5,000 $6,000

2011 $5,000 $6,000

* Future contribution limits may be adjusted for cost-of-living increases. Contributions for the current tax year must be made by April 15 of the following year, unless April 15 falls on a Saturday or Sunday.

Shown below is the maximum amount you can invest in IRAs each year, depending on your age.

I chose a Roth IRA

Age: 38

Filing status: Single

Modified adjusted gross income: $35,000

“

Although I could take a tax deduction for a traditional IRA, I’m going with a Roth because I like the idea of taking tax-free distributions when I reach age 59½. Who knows how high federal income taxes will be by the time I retire?

_”

I chose a traditional IRA

Age: 45

Filing status: Married

“

I picked a traditional IRA, while my husband went with a Roth. This gives us the best of both worlds. My traditional IRA allows us to deduct the entire contribution on our tax return — a definite advantage.

_”

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Traditional IRA Roth IRA

Tax deductibility You may qualify for a tax deduction (credit) on your contributions if your household income doesn’t exceed certain limits. (Please see table on page 1.) The maximum credit is 50% of your annual contribution, not to exceed $2,000.

Contributions are made with after-tax money and aren’t tax-deductible.

Tax-deferred/tax-free

growth Your earnings grow tax-deferred until withdrawn. Your earnings grow tax-free if certain conditions are met (see below).

Withdrawals Withdrawals are taxable, and those made before you reach age 59½ are subject to a 10% federal tax penalty unless you, as the IRA owner, qualify for one of the following exceptions:

 You’re disabled

 You take withdrawals as substantially equal periodic payments

 The withdrawal is for payment of certain unreimbursed medical bills

 The withdrawal is for payment of health insurance premiums during a period of unemployment lasting at least 12 weeks

 The withdrawal is for payment of qualified education expenses

 The withdrawal is for the purchase of a first home (up to $10,000 lifetime maximum) Withdrawals made by beneficiaries (after your death) are not subject to a 10% tax penalty.

Withdrawals of contributions can be made at any time without taxes or penalty. The withdrawal of earnings is always penalty-free and may also be tax-free if it has been at least five years since the initial contribution to the account and you, as the IRA owner, meet one of the following exceptions:

 You’re age 59½ or older

 You’re disabled

 You’re purchasing a first home (up to $10,000 lifetime maximum)

Withdrawals made by beneficiaries (after your death and the five-year investment period) are not subject to taxes or a 10% federal tax penalty.

Age limit for

contributions You may contribute to a traditional IRA if you’re

younger than age 70. As long as your income meets the eligibility requirements, contributions may be made to a Roth IRA at any age.

Required minimum

distributions (RMDs) You must begin taking RMDs no later than April 1 of the year following the year in which you reach age 70½.

You, as the IRA owner, are not required to take minimum distributions during your lifetime. Your beneficiaries, however, must begin taking minimum distributions immediately after your death.

Taxability of retirement

plan rollovers You may roll any non-Roth portion of your retirement plan account into a traditional IRA without tax consequences.

If you roll the non-Roth portion of your retirement plan account into a Roth IRA, it’s a taxable event, but the amount is not subject to a 10% early withdrawal penalty.

Which is right for you?

Here’s a side-by-side comparison of each IRA option and various factors you should keep in mind.

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Step 3 | Review your financial circumstances

Are you on track?

Investing in an IRA can help you move toward your retirement goals. To help you stay on track, we encourage you to:

 Review your quarterly statements.

 Check in with your financial adviser once a year.

 Discuss with your financial adviser whether you’re still eligible to contribute to the IRA(s) you invest in. (For example, you can no longer make contributions to a traditional IRA after reaching age 70, or your household income may eventually preclude you from making contributions directly to a Roth IRA — see the conversion information on the next page.)

About to change jobs or retire?

If so, and you’ve been participating in your employer’s retirement plan, you’ll need to decide what you’d like to do with the money in your account. Contact your financial adviser to learn about your options, one of which is rolling your assets into an IRA.

Ready to withdraw your money?

At this critical point, before you make a move, ask your financial adviser about the best strategy for taking money out of your IRA. He or she can help you minimize any taxes or penalties you may owe. In addition, you should always consult your personal tax adviser before making any tax-related decisions.

Are you turning 70½?

You probably don’t celebrate “half” birthdays, but reaching the age of 70½ is a milestone, according to the IRS. During that year, you must begin taking money from your tax-deferred retirement plan

accounts and traditional IRAs. Your required minimum distribution, or RMD, is calculated according to IRS guidelines. Contact your financial adviser for help calculating your RMDs.

Is your beneficiary up-to-date?

It’s a common mistake — investors forget to name a beneficiary or update an old beneficiary designation. But should an unexpected tragedy occur, who will inherit your IRA account? You can determine how your IRA will be passed on by naming a beneficiary. (In the event you fail to name one, the IRA agreement that’s part of your application explains how your account will be distributed.) Be sure to complete the IRA Beneficiary Change Form to ensure your account is passed on as you wish.

For more information about

investing in an IRA, contact

your financial adviser or visit

americanfunds.com, go to the

“Retirement Planning” tab and

click on “IRAs.” (Or, go directly to

americanfunds.com/ira.)

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Converting a traditional IRA to a Roth IRA

If you have a traditional IRA, you may convert it to a Roth IRA regardless of your income or tax-filing status. The benefits of a Roth IRA include:

 Tax-free withdrawals — Distributions are tax-free if you take them at least five years after your initial contribution or latest conversion and you are at least age 59½ or disabled or use the money for a first-home purchase ($10,000 lifetime limit). Also, when you pass away, your beneficiaries can generally take tax-free withdrawals.

 Tax diversification — If you have both tax-free accounts (such as a Roth IRA) and tax-deferred accounts (such as a 401(k) plan or a traditional IRA), you’ll have the income flexibility you may need during retirement as your tax rate rises or falls.

 No required minimum distributions (RMDs) — RMDs are not required during your lifetime, as the Roth IRA owner.

 Estate planning — After your death, your beneficiaries must begin taking RMDs, but will receive the money income-tax-free.

A Roth conversion may be worth considering if you:

 Can leave the money in the account for at least five years after your first contribution and until you reach age 59½

 Expect tax rates to rise in the future and, as a result, would rather pay taxes now

 Can pay the resulting income taxes from a source other than the IRA so that the full amount of the traditional IRA goes into the Roth IRA for a greater opportunity to grow until it’s withdrawn.

Conversions are taxable events

If you convert to a Roth IRA, you’ll likely have to pay income taxes on some or all of the IRA amount — contributions and earnings in the traditional IRA that haven’t yet been taxed.

Talk with the professionals

IRA conversion rules and tax calculations can be complicated, and state income-tax rules for conversions may differ from federal rules. Because a misstep could result in unforeseen income taxes or penalties, we encourage you to discuss conversion options with your tax consultant and financial adviser.

You can change your mind

If you convert to a Roth IRA and then change your mind for any reason (for example, if the account value declines), you can convert back to a traditional IRA. The only catch: this reversal, known as a “recharacterization,” must be completed before the tax-filing deadline with respect to the year that the conversion was implemented.

I decided to convert to a Roth IRA

Age: 52

Filing status: Single

“

I make too much money to contribute directly to a Roth, so I’m taking advantage of the ability to convert my traditional IRA. I’m OK with paying taxes now, because I’ll be able to enjoy tax-free distributions when I retire in about 15 years.

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The right choice for the long term

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You should carefully consider the objectives, risks, charges and expenses of the American Funds and, if applicable, any other investments in your IRA. This and other important information is contained in the funds’ prospectuses and summary prospectuses, which are available from a financial professional and on the Web. Please read the prospectuses carefully before investing.

Tax issues involving IRAs can be complex. Please consult with your tax or legal adviser before making any decisions.

Why choose an IRA that’s invested in

the American Funds?

Paying for retirement will most likely be the biggest expense you’ll ever have. And it’s the one time you can’t afford to end up short of money. American Funds understands this. That’s why we encourage you to consult with an experienced financial adviser — so you can be sure you’re investing your money wisely. For nearly 80 years, American Funds has invested with a long-term perspective and attention to risk — an investment strategy that has helped us earn our shareholders’ trust.

Here are the five factors behind our investment approach:

A long-term, value-oriented approach

American Funds seeks to buy securities at reasonable prices relative to their prospects and hold them for the long term.

An extensive global research effort

American Funds investment professionals travel the world to find the best investment opportunities and gain a comprehensive understanding of companies and markets.

Ask your financial adviser how each of these factors benefits you as an American Funds shareholder. You can also learn more about the American Funds at americanfunds.com.

The multiple portfolio counselor system

American Funds unique approach to portfolio management, developed more than 50 years ago, blends teamwork with individual accountability and has provided us with a sustainable method of achieving fund objectives.

Experienced investment professionals

American Funds portfolio counselors have an average of 26 years of investment experience, providing a depth of knowledge and broad perspective that few organizations have.

A commitment to low management fees

The American Funds provide exceptional value for shareholders, with management fees that are among the lowest in the mutual fund industry.