Roth IRA
Grow Your Retirement Funds
and Save on Taxes with a Roth IRA
What is a Roth IRA?
The Roth Individual Retirement Account is a retirement investment plan that offers another option
for people to invest for retirement. It is popular because of the benefits it offers.
The decision to open a Roth IRA should be based on a number of factors, such as your age, current
income tax rate, expected income tax rate in retirement, how many years you will invest and the
expected rate of return. To help you analyze these often-complicated factors, it makes sense to
seek the help of an investment professional.
Features and Benefits of a Roth IRA
Key benefits of a Roth IRA:
- Contributions Grow Tax-Deferred
Contributions to a Roth IRA are not tax deductible, but they can be withdrawn tax free
(this contrasts to a Traditional IRA, in which contributions may be tax deductible
and taxes are owed on withdrawals).
- Withdrawals Not Mandatory During Your Lifetime
Unlike a Traditional IRA, you are not required to start making withdrawals after age
70½. If you don't need the money, the account continues to grow tax-free.
In
addition, you can continue to put money into a Roth IRA after you reach 70½ as
long as the money comes from earned income, not investment income. Because you
are not required to make withdrawals during your lifetime, a Roth IRA becomes an
estate planning tool because you can pass your account intact to heirs.
Other important features of a Roth IRA:
- Contribution Levels
The maximum annual contribution to a Roth IRA is $5,000 for individuals, $10,000 for married couples in 2009. These limits are higher for individuals age 50 and older.
- Rollovers
Rollovers can be made from a Traditional IRA into a Roth IRA, provided your
Modified Adjusted Gross Income (MAGI) is less than $100,000. However, you will
need to pay income tax on the converted assets.
The money for the tax should
come from assets outside of your IRA. Otherwise, if you use funds from your IRA
to cover the taxes, you'll owe a 10% penalty for early withdrawal if you're
under age 59½ since 100% of the previous IRA was not placed into the new
Roth IRA. This may set back your retirement savings too much to make a Roth IRA
Rollover worthwhile.
- Tax-Free Earnings
Earnings can be taken out tax-free and penalty-free if a Roth IRA has been held for at
least five years and you meet one of the following: You are over the age of 59½, the
funds (up to $10,000) are used for the purchase of a first home or the withdrawal
is due to death or disability.
Who should consider a Roth IRA?
Although each situation is unique, in general, a Roth IRA may meet your needs if:
- You are a single individual with an MAGI of less than $105,000 for 2009 or a married couple filing jointly
with an MAGI of less than $166,000 for 2009. (For a rollover from a Traditional IRA, MAGI
for singles and married couples must be less than $100,000.)
- You expect your income tax rate to increase or stay high at retirement.
- You have the cash outside your IRA to pay the tax if you roll over a Traditional IRA
into a Roth IRA.
- You are close to retiring or are already retired and anticipate that you will not need
all of the money in your Traditional IRA.
- You want to use your Roth IRA as an estate planning tool.
- You are under age 59½ and want to use a tax-sheltered investment for key
expenses, such as a first house.
- You may need to access your account within five years. If so, the Roth IRA offers
favorable tax treatment because you may withdraw contributions tax-free at any time.
Dearborn & Creggs Can Help
Today, you may no longer rely on just your company pension and Social Security to provide adequate
funds for retirement. You should consider developing a retirement investment plan that makes
maximum use of available tax benefits, so that your retirement assets will grow more quickly. If
you meet the criteria, consider a Roth IRA. However, because the rules governing a Roth IRA are
complex, you should work with a financial and tax professional.
A Dearborn & Creggs financial representative looks forward to working with you to explore
the opportunities offered by a Roth IRA.
RETIREMENTSOLUTIONS
