The Taxpayer Relief Act of 1997, which took effect January 1, 1998 created the new Roth IRA.
What is the Roth IRA?
Unlike traditional IRAs, contributions to a Roth IRA are non-deductible. Up to $2,000 can be contributed annually after tax for singles with adjusted gross incomes (AGIs) up to $95,000 and is not available after $110,000. For couples, up to $4,000 can be put away annually, after tax with AGIs up to $150,000 and is not available after $160,000.
Advantages of the Roth IRA
Although you can't deduct contributions to a Roth IRA, you can benefit from its many other valuable tax advantages.
- Tax-free earnings growth. Like a Traditional IRA, you won't pay taxes on any earnings while they remain in a Roth IRA.
- Tax-free and penalty-free withdrawals. Since Roth IRA annual contributions are after-tax and come out first when you take a distribution, you may withdraw these contributions any time - tax and penalty free, provided your aggregate distributions from all of your Roth Contributory IRAs do not exceed your aggregate annual Roth IRA contributions. Unlike a Traditional or Rollover IRA, you won't owe any taxes on earnings you withdraw from a Roth IRA - as long as the account has met the five year aging requirements and you're over age 59 1/2.
- Tax-free and penalty-free withdrawals for first time home purchase. As long as the Roth IRA has met the five year aging requirements, you can take tax-free and penalty-free withdrawals prior to age 59 1/2 to apply toward buying a home. The withdrawals must be used for qualified first home expenses, and there is a lifetime limit of $10,000 on withdrawals for this purpose.
- Penalty-free withdrawals for higher education. You can also withdraw from your Roth IRA prior to age 59 1/2 to pay for eligible higher education expenses for you, your spouse, or the children or grandchildren of you or your spouse -- without being subject to the 10% penalty. Withdrawals of this type are, however, subject to income taxes.
- No restrictions on retirement distributions. The new Roth IRA does not require minimum distributions beginning at age 70 1/2, giving you additional time to take advantage of tax-free earnings. In fact, you are never required to withdraw your money at any age, so you can pass your Roth IRA assets on to your beneficiaries if you wish.
For more information, or to open an IRA, call one of our Customer Service Representatives or visit our office.
Other Roth Web Sites
www.rothira.com - Billed as the Roth IRA Web Site Home Page, this includes both technical information for financial planning practitioners as well as detailed information useful to consumers. The annotated list of contents includes articles from such publications as Forbes magazine and The Wall Street Journal. But of most use may be the on-line calculator from Strong Funds and the interactive worksheet from T. Rowe Price. However, the site does push the software of the site's sponsor, Brentmark Software, Inc.
www.pensionplanners.com - This site includes more concise Roth IRA information including a brief discussion of drawbacks and advantages to converting an existing IRA into a Roth IRA.
www.irs.ustreas.gov/plain/hot/tax-law.html - A good summary of Roth IRA rules from the Internal Revenue Service, the agency in charge of the new rules and regulations. Unfortunately the IRA material is buried inside other aspects of the Taxpayer Relief Act of 1997 which created the Roth IRA.