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Roth IRA
A retirement arrangement that takes after tax contributions, but qualified withdrawals are tax-free.
What are the tax benefits of a Roth IRA?
Unlike contributions to a Traditional IRA, contributions made to a Roth IRA are not deductible. The major benefit of Roth IRAs is that earnings from investments are tax-free.
What are the eligibility requirements for a Roth IRA?
Unlike the Traditional IRA, there is no 70 1/2 age limit on making contributions. Individuals of any age with compensation are eligible to contribute to a Roth IRA. The total amount you may contribute to a Roth IRA for 2006 can not exceed the lesser of $4,000 or 100% of compensation ($8,000 for married couples).
If you maintain a Traditional IRA, the maximum contribution to your Roth IRA is reduced by any contributions made to your Traditional IRAs.
How much can I contribute?
By the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA ), the annual contribution limit for both traditional and Roth IRAs will gradually increase from $4,000 to $5,000 in the year 2008.
| Year |
IRA Contribution Limit |
Catch-up Contributions
(age 50 or over) |
2007 |
$4,000 |
$5,000 |
2008 and after |
$5,000 |
$6,000 |
Indexed for inflation after 2008
Individuals with adjusted gross income (AGI) up to $114,000 and married
couples with AGI up to $166,000 are eligible to make $5,000 per year
contributions to a Roth IRA.
AGI (Single) |
AGI (Married) |
Limits |
Less than $99,000 |
Less than $156,000 |
Contribution can be made up to $5,000 |
$99,000 - $114,000 |
$156,000 - $166,000 |
Contribution can be made, but less than $5,000 |
More than $114,000 |
More than $166,000 |
Cannot qualify for a Roth IRA |
When can I withdraw from a Roth IRA?
For distributions to be "qualified distributions" that are entirely tax free, they have to meet two requirements. First, the distribution must be made after the 5-tax-year period beginning with the first tax year for which a contribution was made to an individual's Roth IRA. Second, the distribution must be made after one of the four following events has occurred:
- The participant has attained age 59 1/2.
- The distribution is paid to a beneficiary due to the participant's death.
- The participant has become disabled.
- The withdrawal is made to pay qualified first-time home buyer expenses.
If a distribution does not meet these requirements, it is referred to as a non-qualifying distribution. A non-qualifying distribution will be subject to taxes (and in some cases early distribution penalties) to the extent they exceed your aggregate contributions to Roth IRAs.
Can I convert my Traditional IRA to a Roth IRA?
You can convert a Traditional IRA to a Roth IRA if certain specific rules have been followed.
- AGI must be $100,000 or less.
- For married couples, tax returns cannot be filed separately.
- You must pay taxes on all the pre-tax dollars you convert.
- The conversion must be completed within 60 days.
How do you decide between a Traditional IRA and a Roth IRA?
The answer to this question depends on a number of variables including your assumptions about your future tax rates. For example:
- If you are not eligible to deduct Traditional IRA contributions but qualify for a Roth IRA, then the Roth IRA is the better choice. Roth IRA contributions are made in after-tax dollars while earnings are generally are not taxable.
- If your Traditional IRA contribution is tax deductible and you are also eligible to contribute to a Roth IRA, then
- if you expect your retirement tax rate to be equal or higher than it is today, a Roth IRA should yield the greatest benefit.
- if you expect your retirement tax rate to be much lower than it is today, you should probably choose a Traditional IRA.
*This information should not be construed as providing tax or legal advice. Please consult with your tax advisor or attorney regarding your individual situation.
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