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Now browsing: Hometown News > Business Columns > Chadwick L. Hargis

Chadwick L. Hargis
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Roth IRA: Invest today for tax-free distributions tomorrow
Rating: 2.72 / 5 (189 votes)  
Posted: 2007 Jun 08 - 02:53

When it comes to investing your retirement assets, the taxation of your earnings should be a major consideration.

A Roth IRA may offer you a way to avoid federal taxation on your IRA earnings not only while they are invested, but also when you withdraw the money.

There are no up-front tax deductions with the Roth IRA like there can be with a traditional IRA, where all contributions are made on an after-tax basis.

Instead you are allowed something that is potentially more valuable over the long run the opportunity for tax-free investment earnings and tax-free distributions if you meet certain requirements.

Many factors, including adjusted gross income, current age, number of years until retirement, growth rate earned on investments and current and future income tax brackets will determine whether the Roth IRA is an appropriate choice.

Roth IRA Features

A Roth IRA is similar to a traditional IRA in certain ways. If eligible, you can contribute up to $4,000 of earned income to a Roth IRA for 2007. The $4,000 limit applies whether you contribute to a Roth IRA, a traditional IRA, or a combination of the two.

You may also contribute up to $4,000 of earned income to a Roth IRA on behalf of a spouse who has little or no earned income.

That's a total of $8,000 that may be contributed to Roth IRAs, if both you and your spouse are younger than 50.

Furthermore, if either of you will be 50 or older by year-end, an additional $1,000 catch-up contribution for 2007 can potentially be made to a Roth IRA on behalf of each qualifying person.

Thus, if one of you is younger than 50 and the other is 50 or older, the combined Roth IRA contribution may be as much as $9,000. If both are 50 or older, a total of $10,000 may be contributed.

These limits are scheduled to increase in the future.

The basic IRA contribution limit (i.e., before taking into account any potential catch-up contribution) is scheduled to increase to $5,000 a person in 2008 (adjusted for inflation in $500 increments in 2009 and later years).

While there are many similarities between the two, a Roth IRA is different from a traditional IRA in many ways:

. No tax deduction is available for contributions.

. Roth IRA eligibility phase-out limits for 2007 are AGI of $99,000 - $114,000 for single taxpayers and $156,000 - $166,000 for married taxpayers filing jointly.

. You may contribute to a Roth IRA even if you are an active participant in an employer-sponsored qualified retirement plan, as long as you otherwise meet the income requirements to contribute to a Roth IRA.

. There are no required minimum distributions from the Roth IRA at age 70, and you can continue to make contributions beyond age 70 as long as you have earned income.

. Withdrawals of earnings can be made income tax free and without penalty if the account has been in existence for at least five tax years and you are at least 59, if you are disabled, if the distribution is for the first time purchase of a home (up to a $10,000 lifetime limit) or if the account owner has died.

. You may withdraw the dollar amount that represents the after-tax Roth IRA contribution at any time without penalty or taxation.

Converting an IRA

Certain investors with traditional IRAs are able to roll their funds over to a Roth IRA.

This conversion of assets from a traditional IRA to a Roth IRA is treated as a distribution.

Therefore, the amount converted is subject to income taxes in the year of the conversion on the portion of the traditional IRA that is taxable (subject to special rules that apply in 2010).

Some other rules you should know about converting a traditional IRA to a Roth IRA include:

. Single taxpayers and married couples filing jointly with adjusted gross income of $100,000 or less are eligible for the conversion. Beginning in 2010, the $100,000 AGI limit and tax filing status requirement for Roth IRA conversions will no longer apply.

. The conversion is a taxable and reportable event; however, if you are under 59, the 10 percent penalty for early distributions does not apply to the amount you convert to the Roth IRA.

. A five-tax year waiting period applies for taking a qualified distribution from a Roth IRA.

Chad Hargis is a Financial Advisor at UBS Financial Services, Marina Tower, Melbourne. He can be reached at (321) 729-6770 or chad.hargis@ubs.com.

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