Roth IRA
2/16/2004
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Roth IRA is a relatively new personal retirement savings plan. While Roth IRA in many respects is treated like a regular (I.e. traditional) IRA, it also has several significant differences.
First, contributions made by a taxpayer into a Roth account are not tax deductible. However, qualified distributions from the Roth are tax-free. (Contributions to Roth are still eligible for tax credit for retirement contributions for certain taxpayers).
In other words, all the earnings from the Roth IRAs will be exempt from one’s gross income when withdrawn. As a result, Roth IRA provides one of the hard-to-find tax-free incomes for taxpayers.
In addition, as qualified distributions from Roth are exempt from one’s gross income, they will not negatively affect a taxpayer’s social security benefit related taxes during taxpayers’ retirement years.
Another benefit of Roth is that it is not subject to the mandatory minimum distribution rules imposed on the regular IRAs. Therefore, Roth IRA account holders have the option of leaving the fund in a Roth even when they reach the age of 70 ½. A taxpayer can even make contributions into a Roth after 70 ½ while it's not available for a regular IRA account. This makes Roth an additional tool, among others, of passing one’s savings on to future generations.
Like regular IRAs, a Roth can be established by anyone who has earned income. But the total contributions between Roth and regular cannot exceed $3,000 for the year of 2004. (For those who are 50 or older, an additional $500 is allowed).
When eligible for both Roth and regular IRAs, a taxpayer faces choices between the two. Generally speaking, Roth is more tax advantageous if the taxpayer has time on his or her side. That is to say, the longer one can hold the retirement account without tapping into it, the more favorable a Roth account is.
In fact, Roth is easier to qualify for taxpayers to make contributions, too. A single taxpayer can make full amount of Roth contribution with the annual adjusted gross income (AGI) under $95,000. It will not phase out until the annual AGI reaches $110,000. For a married couple, they both can make contributions to Roth with the annual AGI under $150,000 and only will not be eligible when their AGI exceeds $160,000.
If you want to calculate which one, Roth or regular IRA, is more suitable for your particular situation, or you are not sure about some related issues such as rollovers and/or conversions of either your regular, Roth, or 401(k), etc., please feel free to contact us for a 30-minutes free consulting.
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