Roth IRA Advice
When planning for retirement, consider the advantages of a Roth IRA. You pay your income tax on the funds up front, then tuck in your nest egg and let it grow. The interest you earn is tax-free. The government imposes no regulations on when you must begin withdrawing your money, and because you have already paid Uncle Sam, your withdrawals are non-taxable. However, before you put all your eggs in the Roth basket, you should compare and contrast it to a traditional IRA.
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History
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The Roth IRA was a component of the Taxpayer Relief Act passed by Congress in 1997. Introduced by Delaware Senator William Roth, the Roth IRA was the second type of individual retirement account sanctioned by the U.S. government. Lawmakers intended the first IRA legislation, enacted in 1974, to provide those workers whose employers had no retirement provisions, to save a limited amount of money each year tax-free, only paying tax on those funds upon withdrawal.
Features
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The definitive difference between a standard IRA and a Roth IRA is the way each is taxed. You can deposit pre-tax funds into a standard IRA, but you will pay federal income tax on both the principal and interest upon withdrawal. In contrast, you pay tax on deposits to your Roth IRA, but when you withdraw them, you pay no additional tax either on the principle or interest. You will enjoy a larger reward later, and if the federal tax rate has risen during the intervening years between deposit and withdrawal, you are better off to have paid your tax at the lower rate.
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Rules
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As of 2010, the annual deposit limit for Roth IRAs is $5,000 for you, plus $5,000 if you have a spouse. If either of you are over the age of 50, your limits are $6,000 each. To qualify for these contribution maximums, your combined adjusted gross income (AGI) must fall below $167,000 for the current year. If you make over that amount, your contribution limit is phased down to zero at an AGI of $177,000. Also, you must have earned, as a couple, at least the amount of your yearly deposit. If you are single, you can make the maximum deposit of $5,000 -- or $6,000 if over 50 -- provided that your AGI is under $105,000 with the contribution limit phased down to zero at an AGI of $120,000.
Considerations
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As of 2010, there are no longer income cap limits for converting a traditional IRA to a Roth IRA. In so doing, you can avoid having to make minimum withdrawals at age 70 1/2. Conceivably, you could let your account grow and will it to a family member who could also let it keep growing until the funds are needed. While you must pay taxes up front on the sum you convert from an IRA to Roth IRA , you may glean better long-term returns on your money. In fact, according to Roth IRA Advisor, " if you convert $100,000 today, then in 20 years, you are $51,227 ahead" (using reasonable assumptions).
Warning
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Converting your IRA to a Roth IRA can have tax disadvantages. If you are at the zenith of your earning potential when you invest in an IRA and foresee that you will fall into a far lower tax bracket when you retire, you may benefit more from a traditional IRA because you will get the tax savings now, when you need them most.
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