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Roth IRA Basics and Benefits

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Roth IRA Basics and Benefits

Category: Retirement Planning

The Roth IRA is one of the smartest saving and retirement planning tools available to investors. Unlike the traditional IRA or 401K, contributions to the Roth IRA are not tax deductible, but the benefit of the Roth IRA is the ability to make withdrawals tax-free when you retire.

Other Roth IRA Benefits

 • Contributions can be taken out at any time without taxes or penalties. • Under special circumstances (Qualified Distributions), withdrawals of earnings (capital gains, interest, and dividends) are penalty and tax free.

 • Contributions may be made after age 70 ½ as long as you have earned income. • Since you have already paid taxes up front, there are no minimum distribution requirements after age of 70 ½.

 • At death, funds remaining in your Roth IRA will go to designated beneficiaries (they will be subject to a minimum distribution requirement). This provision makes Roth IRA a great estate planning tool.

What Are Qualified Distributions?

 To be tax-free and penalty free, a distribution of earnings must meet two tests:

1. Withdrawals are taken after the 5-year holding period, and

2. One of the following requirements applies. The distribution is:

 • Made on or after the date you reach age 59 ½,

 • Made because you are disabled,

 • Made to a beneficiary or to your estate after your death, or

 • For the first-time home buyer (up to a $10,000 lifetime limit per person, $20,000 for couples).


You may be eligible to make a regular contribution to a Roth IRA even if you participate in your employer-sponsored retirement plan. Most common way of establishing a Roth IRA is by making cash contributions. In order to be able to contribute up to $5,000 per year to a Roth IRA for 2007-2008 ($6,000 if you are 50 or older) you will need to fulfill both requirements:

1) Your adjusted gross income has to be less than $99,000 if you are single or $156,000 if married filing jointly. The amount you can contribute is reduced gradually and then completely eliminated when your modified adjusted gross income exceeds $114,000 for single, or $166,000 if married filing jointly.

2) You or your spouse must have compensation or alimony income in excess of the amount contributed.

Another way of funding Roth IRA is by converting your traditional IRA. The only requirement is that your modified adjusted gross income is less than $100,000. Please note that the amount converted will be added to your income and taxed at the prevailing tax rates.

Here is the good news

 1) The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) will eliminated the $100,000 modified adjusted gross income (AGI) limit effective 2010.

2) Under TIPRA, income from a 2010 conversion of a traditional IRA to a Roth IRA is included in the taxpayer's income over a two-year period, beginning in 2011.

This will provide numerous planning strategies, so contact your financial advisors and start planning early.

Please consult your tax, legal, or investment advisor when making financial decisions. For additional information please visit http://www.irs.gov/pub/irs-pdf/p590.pdf

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Jordan Bauer Jordan Bauer
Date: 3/20/2015
Time: 05:49
Thanks for the advice... :)
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