Regular vs. Roth
The vehicle we now call the Roth IRA was born on January 1, 1998 as a result of the Taxpayer Relief Act of 1997. The Roth IRA provides no deduction for contributions, but instead provides a benefit that isn’t available for traditional retirement accounts: if you meet certain requirements, all earnings are tax free when you or your beneficiary withdraw them. Other benefits include avoiding the early distribution penalty on certain withdrawals, and eliminating the need to take minimum distributions after age 70½. Remember that in either cashing cashing an IRA is very expensive and should only be done for very extreme circumstances.
Plus and minus
The nice part is that you get a tax free retirement vehicle with the downside of not being able to deduct the money you give to your Roth IRA. Which is more important depends on the individual like your income level and how soon you will need the money. Usually a Roth IRA is better in most people’s cases especially when the income level in is beneath 160,000. Also you will not have to take money from it until age 70 ½.
Eligibility
You can establish a Roth IRA by making a regular contribution to a Roth IRA or by converting a traditional IRA to a Roth IRA.
You may be eligible to make a regular contribution to a Roth IRA even if you participate in another retirement plan maintained by your employer. These contributions can be as much as $5,000. There are just two requirements. First, you or your spouse must have a qualifying income at least equal to the amount contributed. Secondly, your modified adjusted gross income cannot exceed certain IRA income limits. For the maximum contribution in 2008, the limits are $101,000 for single individuals and $159,000 for married couples filing joint returns. As your income grows above these levels, the amount you can contribute is reduced gradually and then is completely eliminated. Even at these income levels it is not good to cash your IRA because you can no longer contribute to it.
You can convert your regular IRA to a Roth IRA if your modified adjusted gross income is $100,000 or less, and you’re single or file jointly with your spouse. Beginning in 2010, these limitations on Roth conversions disappear. You’ll have to pay tax in the year of the conversion, but for many people the long-term savings outweigh the conversion tax.
Distributions
The IRA distribution tax for Roth IRAs continue to be tax-free until you’ve taken all of your regular contributions. After that you’ll withdraw any and all conversion contributions, if any. After that all distributions come from earnings. Keep in mind that withdrawals of earnings are tax-free if you’re over age 59½ and at least five years have passed since you established your Roth IRA.
With any and all of these vehicles please consult the appropriate experts for further information.
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Tags: IRA, roth ira, traditional ira
This entry was posted on Monday, October 27, 2008 at 2:10 pm and is filed under IRA. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
2 Responses to “Regular vs. Roth”
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Miranda Says:
I’m glad I have a Roth IRA. It simplifies things for me as someone who is self-employed. And we’re opening one for my husband soon — something I’m excited about.
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Ed Torres Says:
November 2nd, 2008 at 10:50 am
Thanks for the information.
What is your opinion on Self-direct IRA accounts?
The banks seem not to know much about them.
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