Roth Vs. Basic IRA
There are two basic consumer Individual Retirement Account structures: the traditional IRA and the Roth IRA. There are some very key differences between the two structures, most fundamentally lodged between taxable retirement income and tax-free retirement income. Understanding the differences will help you understand which structure is best for your immediate and future needs.
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Traditional IRA Basics
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The traditional IRA structure is the original structure created by the Employee Retirement Security Act of 1974. It has developed and modified with tax legislation over the years, but the fundamentals remain the same in 2011. Consumer eligibility is based on Adjusted Gross Income and tax filing status. The 2011 contribution limit is $5,000 with $1,000 allowed for catch-up contributions for consumers at least 50 years of age. Consumers who meet the AGI limits make fully deductible contributions, reducing modified AGI. Funds grow deferred until age 59 1/2 when normal distributes are allowed. Normal distributions are added to AGI, early distributions are added to AGI and penalized 10 percent by the IRS.
Roth IRA Basics
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The Roth IRA was developed based on legislation in 2001, the Economic Growth and Tax Relief Reconciliation Act. The Roth IRA has the same contribution limits as a traditional IRA. The differences is the income restrictions prevent full contributions rather than limiting what is deductible. The Roth gets no deduction for contributions. Normal distributions are tax free. A normal distribution is qualified by the owner being 59 1/2 years old and owning the Roth for a minimum of five years.
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Traditional Income Limits
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The AGI phaseout limits for traditional IRAs are different if the owner is covered by an employer retirement plan. Someone filing as a single person or head of household with no other coverage has no income limits for fully deductible contributions. A married couple or widow has a phaseout range of $169,000 to $179,000 in 2011. Those covered by employer plans have limits drop with single phaseout range limits of $56,000 to $66,000. Married couples filing joint returns have a phaseout range of $90,000 to $110,000. Anything below the range allows fully deductible contributions, partially deductible contributions within the range and no deduction over the range.
Roth Income Limits
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The Roth AGI limits are not contingent on whether the owner is covered by an employer's retirement plan. Single filers have a phaseout range of $107,000 to $122,000 in 2011. Married couple filing joint returns have a phaseout range of $169,000 to $179,000. Any income level below the range allows full contributions. Partial contributions are allowed within the phaseout range and no contribution is allowed above the range.
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