ROTH IRA
Who is this "Roth" person and why does he have an IRA named after him? You've no doubt heard of a Roth IRA but might not know what makes a Roth IRA different from a Traditional run of the mill IRA. You'll find those answers below. And, in case your curious, we'll answer the "Who is this Roth guy" question at the end of this page.
The Roth IRA came to life as part of the Taxpayer Relief Act of 1997. The primary goal of the Roth IRA was to encourage more Americans to participate in saving for their retirement. However, not all wage earners are eligible for a Roth IRA. Eligibility is based on your Modified Adjusted Gross Income (MAGI) as follows:
| Federal IncomeTax Filing Status | Beginning of AGI Phase-Out Range | End of AGI Phase-Out Range |
|---|---|---|
| Single (2010) | $105,000 | $120,000 |
| Single (2011) | $107,000 | $122,000 |
| Married, Filing Jointly (2010) | $167,000 | $177,000 |
| Married, Filing Jointly (2011) | $169,000 | $179,000 |
| Married, Filing Separately (2010) | $0 | $10,000 |
| Married, Filing Separately (2011) | $0 | $10,000 |
For example, assume you are married, filing a joint Federal Income Tax return and your MAGI is $122,000. You are eligible to make a full $5,000 contribution to your Roth IRA and also to your spouse's Roth IRA. If you are over 50 years of age during the tax year, an additional $1,000 may be contributed as a "catch-up contribution." However, if an individual is a single Federal Income Tax filer with an MAGI of $130,000, no Roth IRA contribution can be made for that year. A final example is a married individual, filing a separate Federal tax return, who earns $5,000. In this case, you utilize the range to determine the percentage of a full $5,000 contribution that can be made to a Roth IRA for the year. Since the range is $10,000 and the earnings exceed the bottom of the range by $5,000 or 50%, only $2,500 can be contributed to a Roth IRA for the tax year (50%*5,000), assuming the individual is under 50 years of age. This same calculation is used in all ranges of the table above.
The investment growth in a Roth IRA provides for tax-free distributions and can benefit retirement savers both young and those approaching (or past) retirement. But, is it the right choice for you?
You can also convert a Traditional IRA to a Roth IRA for the 2011. To determine if you want to convert, contact your tax advisor or other financial professional, you can also click here to access our Roth Conversion calculator for guidance.
A Roth IRA provides several key differences from a Traditional IRA. Regardless of your age, a Roth IRA can enable you to have greater control over your retirement nest-egg. It can also deliver tax-free investment growth and enable you to leave a larger inheritance to your heirs.
Roth Vs. Traditional IRA
Unlike a Traditional IRA, Roth IRA assets are taxed at the time of contribution. Since you are paying taxes on your contributions up front, your qualified distributions and earnings are tax-free. So, if you want to make an IRA contribution and are eligible for a Roth IRA but not eligible to deduct contributions to a Traditional IRA, the Roth IRA is likely your best choice. (For to help determine if you might be eligible to deduct a Traditional IRA contribution, click here.)
If you are nearing retirement age, unlike a Traditional IRA, a Roth IRA has no minimum distribution requirements. You can continue contributing to your Roth IRA after you reach age 70 1/2 and leave amounts in your Roth IRA as long as you live. Traditional IRAs require you to start taking distributions and don't allow for contributions after age 70 1/2. With a Roth, your money can stay put, earning interest all the while. And, since you have already paid taxes on your Roth contributions, your beneficiaries can inherit your Roth IRA tax free.
The above are just some of the primary differences between a Traditional and Roth IRA. You can reference the table below for additional detail.
| Question | Traditional IRA | Roth IRA |
|---|---|---|
| Is there an age limit on contributions? | Yes. You must not have reached age 70 1/2 by the end of the year. | No. There are no upper age limits on contributions. |
| Is there an income limit to qualify? | No. There is no upper limit on how much you can earn and still contribute. | Yes. Your modified adjusted gross income may not exceed certain limits defined above. |
| Can I deduct contributions on my tax return? | Yes, depending on your filing status and other factors. | No. You cannot deduct contributions. |
| How are distributions taxed? | Qualifying distributions of earnings and pre-tax contributions (including rollovers) are taxed as ordinary income. | Qualifying distributions are not taxed. |
| Can my IRA be inherited tax free? | No. | Yes. Since you've already paid the taxes, contributions can be inherited tax free. |
To determine whether it makes sense for you to convert to a Traditional IRA or Roth IRA, consider how your financial situation might change in retirement and whether your tax rate will be higher or lower when you are ready to withdraw the money.
We have highly-trained live IRA Customer Service Representatives available to assist you in choosing the best IRA solution for you. You can also click here for guidance from our Roth v. Traditional IRA calculator. Contact us today and let us help you make the right choice for your unique retirement situation.
By the way, just in case you are curious about the "Who is this Roth guy?" question, the Roth IRA is named after its advocate, the late Senator William Roth of Delaware. Another note of trivia? Senator Roth was also known for uncovering Pentagon overspending that included the infamous $9,600 wrench!
