The Roth IRA, once referred to as the “Super IRA,” was developed in 1997 with passage of the Taxpayer Relief Act. The Roth IRA program was designed to help people save for retirement. Contributions to a Roth IRA are not tax-deductible like they are with traditional IRAs; however, “qualified distributions” from a Roth IRA are received tax-free, which is why Roth IRAs have become so popular in recent years.
If you have earned income, you may contribute 100% of your earned income, up to the limits listed below, each year to a Roth IRA. You may choose to allocate any amount between either a Roth IRA or a traditional IRA, but the total amount contributed to all IRAs may not exceed the yearly limits. Your spouse, working or non-working, may also make an IRA contribution subject to the same rules.
|Tax year||Under Age 50||Age 50+|
There are no minimum or maximum age limits to a Roth IRA. Attainment of age 70½ does not prohibit you from making contributions. Currently, you are eligible to contribute to a Roth IRA if you are single and your adjusted gross income (AGI) is less than $118,000 (phased out between $118,000-$133,000), or if you are married filing jointly and your AGI is less than $186,000 (phased out between $186,000-$196,000).
Anytime after five years and age 59½, you may make a withdrawal from your Roth IRA tax-free and without incurring IRS penalties. Your principal may be withdrawn at any time and is received tax-free and IRS-penalty-free. You are not required to begin distributions at age 70½, and you can continue to make contributions after age 70½.
Your money may be withdrawn from a Roth IRA at any time. All monies are received tax-free; however, if you withdraw prior to age 59½ or before five years, a 10% early withdrawal penalty will be assessed by the IRS on all interest earned. The following are exceptions to the 10% early withdrawal penalty:
- Payments made to a beneficiary
- Monies withdrawn while you are disabled
- Payments made to you in equal, periodic payments by fixed annuitization
- Withdrawals made for deductible medical expenses
- Money used to pay health insurance premiums (for certain unemployed individuals)
- Withdrawals made for qualified first-time home purchases
- Withdrawals made for qualified higher education expenses
Payments to Beneficiaries
Any monies paid to a beneficiary may be received by one of two methods. The first method, referred to as the Five-Year Rule, means all monies will be distributed within the next five years and then the account will be closed. The second method, the Life Expectancy Option, allows a beneficiary to receive the money over the course of his or her lifetime or in any shorter period of time.
A surviving spouse is eligible for special consideration as a beneficiary, such as the right to roll-over the decedent’s IRA into an IRA in their name.
Existing traditional IRAs may be converted to Roth IRAs. In doing so, the traditional IRA becomes taxable in the year the conversion is completed. All future gains within the Roth IRA will be tax-free.
An additional incentive in the form of a tax credit is available for lower-income taxpayers when they contribute to an IRA or Roth IRA. This credit is in addition to the deduction or exclusion you receive when you contribute to your plan. The maximum credit is $1,000, which decreases as your adjusted gross income exceeds certain limits. Eligibility for the credit is completely phased out if you are single and your income exceeds $30,000 or if you are filing jointly and your income exceeds $61,000.
|Features||Trad. IRA||Roth IRA|
|Tax deductible contributions||Yes||No|
|Contributions beyond age 70½||No||Yes|
|Required minimum distribution at age 70½||Yes||No|
For additional information on IRAs, consult IRS publication 575 – Pensions and Annuity Income. Remember, tax laws change and your personal situation is unique; therefore, you are advised to always seek appropriate advice from your attorney or tax advisor before pursuing any investment.
SNPJ does not assume responsibility for the accuracy of this information. Everyone’s information is different, so you should consult with your tax or legal advisor for your specific situation.