The Rules of Investing From IRAs to Roth IRAs
Choosing between a traditional IRA investment and a Roth IRA investment might seem overwhelming at first. The media provides so much information that you might not know where to start. It is imperative to first understand that an IRA is not an investment on its own; it is a tax-shelter that holds investments. The investment options are the same between the two with a very significant tax difference.
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Tax Structure
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The tax structure is the first component to consider when comparing a traditional and Roth IRA. The traditional IRA uses pretax money, meaning for every dollar you put into the IRA, you can deduct it from your taxable income. The Roth IRA uses after-tax money, meaning for every dollar you put in, there is no deduction from income. When money comes out of the traditional IRA, distributions are added to income. Money coming out of the Roth IRA pays no further taxes. Of course, these rules are contingent on contribution eligibility and qualifying for normal distributions.
Eligibility Basics
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The 2011 IRS regulations determine the maximum annual contribution, the income levels to get deductions and make contributions. Regulations are subject to legislative changes. Both a traditional and Roth IRA allow a $5,000 maximum annual contribution. Contribution eligibility is based on tax filing status, income and employer retirement plan coverage.
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Eligibility Income Limits
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Single tax filers who are not covered by an employer's retirement plan can make a fully deductible contribution regardless of income, though those covered by an employer plan can make fully deductible contributions with income less than $56,000 and partial deductions up to $66,000. Couples filing joint returns have two phaseout ranges; those covered by an employer's plan must make less than $90,000 but not more than $110,000 to make full and partial deductions respectively while those not covered by any other plan have limits of $169,000 to $179,000. Because Roth IRAs allow no deduction, the eligibility rules determine who can make full contributions. Employer plans have no effect on Roth eligibility. Single filers have limits of $107,000 to $120,000 while married couples have limits of $169,000 to $179,000. Anything below the limit allows a full contribution with no contribution allowed over the limit. Partial limits are allowed within the range.
Investments
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The IRS allows many options for investors to meet the various investment experience and comfort zones of millions of consumers. IRAs opened with bank custodians offer conservative investments including savings and certificates of deposit. Brokerage firm IRAs have a wide range of investment choices, including millions of stocks, bonds and mutual fund holdings. There also are real estate IRAs and precious metal IRAs. Find a custodian that offers the investments choices that meet your objectives.
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