The Roth IRA
The Roth IRA is a new Individual Retirement Account (IRA) that was enacted by the Taxpayer Relief Act of 1997, available to investors January 1, 1998. Named after Senator William Roth, Jr., the Roth IRA gives you the ability to invest after-tax dollars as a non-deductible contribution and later withdraw the funds tax-free. This new version of the IRA is referred to as a
"back ended" IRA.
The new Roth IRA adds new and exciting opportunities for investors as they plan for their retirement. As with all investments, we recommend that you enlist the expertise of a qualified financial advisor before making your investment decisions.
How does the Roth IRA work?
The money you contribute to a Roth IRA is after-tax dollars. In other words, unlike a traditional IRA, you cannot deduct your contributions to a Roth IRA from your taxes. The good news is the plan allows the money you contribute to grow tax-free. Distributions are tax free if made for a qualified purpose and satisfy the five-year holding rule. This five year period begins the first tax year the contribution is made.
Who is eligible to participate?
Unlike the traditional IRA, there is no 70 1/2 age limit. You simply need to have earned income equal to the amount you contribute up to a maximum of
$3,000 ($6,000 combined for spouses), per year. Income thresholds do exist, which may reduce the amount you can contribute.
How can I invest my contributions?
Like any other IRA, your contribution may be invested in Certificate of Deposits (CDs), stocks, bonds, or mutual funds.*
How much can I contribute?
Single individuals may contribute up to $3,000 per year if their adjusted gross income
(AGI) is less than $95,000. If an individual's AGI is between $95,000 and $110,000, they contribute a reduced amount adjusted for their income. Married individuals filing jointly may contribute up to
$3,000 each if their AGI is less than $150,000. Contributions for joint filers are reduced for AGIs between $150,000 and $160,000.
Roth IRA contributions may not be made by individuals with an AGI of more than $110,000 or couples with an AGI of more than $160,000.
Beginning in 2002, the Economic Growth and Tax Relief
Reconciliation Act of 2001 allows a catch up contribution of an additional
$500 for people 50 years old and older, bringing their allowed contribution
to $3,500 for tax year 2002. In 2006, the catch up amount will increase to
$1000.
Economic Growth and Tax Relief Reconciliation Act
Increase
2002 - 2004 $3000
2005 - 2007 $4000
2008
$5000
Can contributions be made to a traditional IRA and a Roth IRA in the same tax year?
YES. The maximum aggregate contribution to all IRAs (including the Roth IRA) is
$3,000 per year. You can split your contribution between a traditional and a Roth IRA in any manner you wish as long as the sum does not exceed
$3,000.
Can I convert my existing traditional IRA into a Roth IRA?
YES. You may convert the money from an IRA into a Roth IRA. This type of transaction will be treated as a taxable event. In 1998 only, the taxes due for this transaction can be spread over the next four years. Any conversion occurring after 1998 will be subject to full taxation during that tax year. The IRA Premature Distribution penalty is waived for conversions. Other rules and restrictions may apply.
When can I use my IRA assets?
You must satisfy two conditions to make a tax-free and penalty-free distribution from your Roth IRA earnings. First, the plan must be open for a minimum of five years. Secondly, the withdrawal must be made after the occurrence of one of the following events:
- Age 59 1/2
- Death
- Disability
- First home purchase
- Higher education
Distributions that meet the above requirements are referred to as "qualifying distributions." While you may take distributions from your IRA at any time, those that are not qualifying will be subject to taxes and penalties.
Do required minimum distribution rules and penalties apply to Roth IRAs?
NO. Required minimum distributions do not apply to Roth IRAs. Investors may let their accounts grow tax deferred and continue contributions from earned income, as long as they comply with the maximum issue age of their resident state.
If you would like additional information about the Roth IRA, contact
Doug Lane at (770) 412-4946.
Related topics:
Trust & Investment Services
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