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Roth IRA Information
A Roth IRA Overview
Roth IRA's make sense for many people, but you need to understand the tax rules and assumptions before you act. Generally speaking, you should consider a Roth IRA if you:
- Are not eligible for a deductible IRA
- Have deferred the maximum amount to your Employer Sponsored Plan
- Believe your tax bracket will be higher when you retire
- Currently contribute to a non-deductible IRA
- Want to preserve assets for your heirs
- Want to leave money in your account beyond age 70 ½
Eligibility
Single taxpayers full eligibility ends when adjusted gross income (AGI) reaches $95,000 and is phased out through $110,000. Full eligibility for married taxpayers filing jointly ends when AGI reaches $150,000, with phased-out eligibility through $160,000.
Maximum Contributions
For any single tax year the maximum contribution is $2,000 or 100% of earned income, whichever is less. This applies to all tax payers:
- Whose income is below the prescribed limits
- Married filing jointly (AGI below $150,000) or single (AGI below $95,000)
- Covered by a qualified retirement plan or not
The $2,000 limit includes contributions made to other IRAs. For example, an investor who has made a $1,500 deductible IRA contribution for a year will be limited to a maximum Roth IRA contribution of $500.
Tax Advantages
Earnings in the new Roth IRA are available free of federal income tax after a five-year holding period:
- for a first-time home buyer ($10,000
lifetime limit)
- at age 59 ½
- at disability
- at death
You may subject to a 10% early withdrawal penalty if the earnings are withdrawn before age 59 ½.
Withdrawal Flexibility
In addition to a tax-free and penalty-free withdrawal for a first home purchase (for yourself, your spouse, you and/or your spouses children, grandchildren, grandparents), you may also make penalty-free withdrawals for higher education expenses for family member after the five-year holding period. However, you must pay ordinary income tax on earnings. You can avoid this by withdrawing your after-tax contributions first, at anytime, penalty-free instead of tapping into earnings.
Just like other IRAs, you may also withdraw money without penalty to pay for large medical expenses greater than 7.5% of your AGI, health insurance if you have been unemployed for 12 consecutive weeks, or for substantially equal payments over time. Taxes will be due on earnings distributed.
Converting Current IRAs
Both deductible and non-deductible IRAs can be converted to a Roth IRA. If your AGI doesn't exceed $100,000 whether you are single or married filing jointly, you can switch money from your present IRA into a Roth IRA. If you convert your old IRA to a Roth IRA during 1998, you can spread the tax due as a result of the conversion over four years.
Married individuals filing separately do not qualify. If your income exceeds $100,000, you cannot convert your current IRA balances into a Roth IRA, but you may be able to put future IRA contributions into a Roth, income permitting.
Considerations for Converting
Consider converting if:
- Your AGI is less than $100,000
- You can afford to pay any taxes due over the
next four years (1998 conversions only)
- You can afford to pay any taxes out of current savings
Don't convert if:
- You will be in a substantially lower retirement tax bracket
- You have to pay taxes out of the IRA itself
Summation
A Roth IRA may be beneficial to you depending on the factors explained above, and a comparison of the table below. Be sure to contact one of our administrators before making decisions regarding rollovers and transfers of existing IRAs.
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