Retirement :

When a Roth IRA is Right for You 

A tax-free source of retirement income would seem to have almost universal appeal.  Yet only 13% of U.S. households own a Roth IRA, a retirement investment vehicle that offers tax-free qualified withdrawals. 

The Roth IRA has been around only since 1998, so its unpopularity may be due primarily to misunderstanding.  For example, some people may assume that the benefits of a Roth IRA are too good to last – That Congress will change the laws before investors are able to reap the rewards of tax-free distributions. 

Some people might shy away from a Roth IRA because they would rather postpone current taxes and pay them later.  It’s natural to want to delay the unpleasant as long as possible, but if you expect to be in the same or a higher tax bracket in retirement, paying taxes now may save you money over the long run. 

Some investors might think a Roth IRA is too complicated.  But unlike a traditional IRA or an employer-sponsored plan, a Roth IRA is not subject to annual required minimum distributions after age 70 ½.  As long as Roth IRA withdrawals take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum), and the account has been open for at least five years, distributions will be free of federal tax and penalties. 

By comparison, distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income.  Withdrawals taken prior to age 59 ½ may be subject to an additional 10% federal income tax penalty. 

Of course, not everyone is eligible to contribute to a Roth IRA.  Income restrictions dictate that taxpayers with an income exceeding $110,000 (single filers) or $160,000 (married joint filers) cannot contribute to a Roth IRA.  In addition, combined annual contributions to Roth and traditional IRAs are limited to a total of $4,000 ($5,000 for those aged 50 and older) for individual taxpayers ($8,000 or $10,000, respectively, for married couples).  

Below is a table of IRA contribution limits based on income limits above.

IRA Contribution Limits

 The following is a table of pros and cons of Roth IRA vs. Traditional IRA: 

Roth IRA advantages 

1. Future tax rate higher
2. IRA saving worth more after tax
3. You want access to the funds
4. Withdrawals are not reportable income-they do not affect Social Security payments or increase adjusted gross income.
5. No required minimum distribution by age 70 1/2 – This allows continued growth for benefits to heirs.
6. Eligible contribution can be made at any age.  Traditional contribution stop at age 70 ½
7. Heirs pay no income tax on proceeds.   Traditional IRA will have some tax fees.

 Traditional IRA advantages 

1. income is too high for a Roth
2. you expect your income to be less in retirement than now
3. you expect future tax rate to be lower
4. you need a tax deduction now
5. traditional IRA may provide better protection from creditors

  IRA Conversion restrictions 

1. Modified adjusted gross income is no more than $100K
2. You are not a married individual filing a separate return. 
   

If you have never considered a Roth IRA, now may be a good time to take a second look.   The Roth IRA’s unique tax benefits may be a good fit for your retirement portfolio.