The Roth IRA
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The Tax Relief Act of 1997 made many positive features and savings programs available for a broad spectrum of Americans. While the Baby Boomers and others are enjoying their career successes and improving lifestyles, not enough savings is being invested for the longer- term future. Consequently, it is imperative that people at all income levels adopt a program for saving and investing.
Coupled with the large demographic bulge is the likelihood that many of us will be living longer than we might have expected only a few decades ago. Although inflation is lower than it was a decade ago, expenses do rise and sometimes income does not keep pace. College tuition has become an expense almost impossible to afford for many working Americans. |
The solution is to encourage savings and investment and that is precisely what the Tax Relief Act of 1997 has done.
There are now three different individual savings vehicles:
- Traditional IRA
- Roth IRA
- Education IRA
Like the Traditional IRA, the Roth IRA is an excellent way for working individuals and their spouses to build substantial retirement savings in a regular, disciplined way. Almost all working Americans and their spouses can take advantage of either a Traditional IRA or a Roth IRA’s disciplined approach to building substantial savings for retirement one small step at a time. Everyone with an IRA enjoys deferred taxation on the interest or earnings of their IRA assets, which allows their money to grow even faster. In the case of the Roth IRA, your qualified withdrawals are not taxed even then.
What is the Roth IRA?
The Roth IRA was created by the Tax Relief Act of 1997. While contributions are always non- deductible, earnings and qualified distributions are tax free.
Who is eligible?
You must have earned income or be a non-working spouse of a working spouse. Eligibility to contribute is subject to income limits based on Modified Adjusted Gross Income. For married couples filing jointly, eligibility to contribute is phased out between $150,000- $160,000. For individuals (except married filing separately), this limit is $95,000 - $110,000. (Modified AGI does not include IRA distributions, but does include IRA contributions.)
How much can I contribute?
The contribution is limited to 100% of compensation up to $3000, less any contributions made to other Traditional or Roth IRAs. You may contribute the full amount if your modified Adjusted Gross Income is $95,000 or less for individuals, and $150,000 or less if married filing jointly. You may make a partial contribution if your AGI is in the respective phase out ranges.
How to calculate Roth IRA contribution subject to the income phase-out:
- Take the Ceiling Amount
($160,000 for married filing jointly, $110,000 for individuals)
- Subtract Modified AGI
- Multiply the result by 30% for married couples filing jointly, and 23.33% for individuals
- Round the result up to the nearest $10; subject to a $200 minimum
Example:
Kevin and Kelly are married and file a joint tax return. Their Joint Adjusted Gross Income is $155,000. Because Roth IRAs are always nondeductible, it does not matter whether either is a participant in an employer plan.
$160,000
-$155,000
$ 5,000
$5,000 X 30% = $1,500
So, Kevin and Kelly can each contribute $1,500 to a Roth IRA. |
How long can I contribute to a Roth IRA?
Unlike the Traditional IRA, there is no age limit on eligibility to contribute.
Are there required minimum distributions?
Unlike the Traditional IRA, there are no required minimum distributions once you attain age 70 ½.
Can a Traditional IRA be converted to a Roth IRA?
If your AGI is $100,000 or less, you can convert your Traditional IRA to a Roth IRA by paying income taxes on the deductible contributions and all earnings. (Married couples filing separately are not eligible.)
Who should convert to a Roth IRA?
There is no simple answer to this question. In fact, many people will need a more lengthy consultation to project the benefit or loss. Consider that you must have the funds outside of the IRA to pay the tax. You must also believe that your tax bracket will be higher in retirement or that you never will need to withdraw the funds.
Is there any reason to have a Traditional IRA?
First, remember that you cannot commingle Roth IRAs with any other type of IRA. So, you may have to maintain more than one IRA. Also, Roth IRA's cannot accept rollovers from employer plans.
Traditional IRAs, when you can deduct the contribution, may prove to be more valuable than a Roth IRA in many situations, especially if you anticipate having a lower tax bracket when you will withdraw your funds.
Will I be able to access the assets in my Roth IRA?
If the Roth IRA is over 5 years old and you are 59 ½ or over, distributions are tax free. Currently, your contributions themselves are available for withdrawal without tax penalty. The earnings thereon would be subject to a 10% penalty if you are under age 59 ½, with the following exceptions: death, disability, first home purchase (limited to $10,000), qualified education purposes, certain distributions for some unemployed persons.
| A self-directed Roth IRA at Janney LLC. gives you the opportunity to buy individual securities that meet your needs: listed and OTC stocks, government agency securities, bonds, diverse mutual funds, options, zero coupons and CDs. |
How does all of this affect you?
Depending on your situation and income status, the Roth IRA may be valuable in helping you realize your financial goals for your retirement. Your Janney Montgomery Scott LLC Financial Consultant, together with your tax advisor, can answer all of your questions and guide you to a dynamic savings plan.
The descriptions provided herein are intended to provide background information about IRAs. It is not a complete review of all the legal and tax laws pertinent to these plans. Clients are urged to consult with their legal and/or tax advisors for answers to all technical and tax law-related questions.
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