Saturday, March 21, 2009

Advantages of contributing to a Roth IRA

Look to contribute to a Roth IRA each year since the earnings from these tax-advantaged savings vehicles are never taxed (unlike traditional IRA's which are taxed as ordinary income at your marginal tax rate at the time you take distributions from your traditional IRA). Also, Roth IRA balances are not subjected to the required minimum distribution rules when you reach 70 1/2 years old. Therefore, if you do not need the money at that time, you can continue to let your money grow tax-free and ultimately leave a larger sum to your decedents if you so choose.

Now for some of the mechanics of the Roth IRA:

You can contribute up to $5,000 ($6,000 if age 50 or over) for 2008 and 2009. Keep in mind that your modified adjusted gross income (MAGI) has to be below $166,000 to contribute the full amounts previously mentioned. If your MAGI is between $166,000 and $176,000, then you can contribute some amount less than the full limit. If your income exceeds $176,000, they you are not eligible to contribute to a Roth IRA for 2009. In 2008, this phase-out range is $159,000 to $169,000.

For single individuals, this Roth IRA phase-out limit is lower: $105,000 to $120,000 for 2009. In 2008, a single individual’s income restriction is between $101,000 and $116,000.

Remember that you still have until April 15 of this year to make a contribution to any IRA account for 2008.

Finally, a big advantage to a Roth IRA is that you can use this as an emergency fund since you can withdrawal your principal (the amount you've actually contributed to the Roth IRA) at any time without penalty. This will allow you to garner a market rate of return on your emergency funds while possibly building a source of retirement income at the same time.

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  1. What if you want to convert a Tradition IRA to a ROTH IRA? I believe it can be done but your investment broker will provide you a 1099 with the dollar conversation. This figured will be added to your AGI and you will have to pay tax on the Traditional IRA. Still a good deal since hopefully you are working and paying the tax in today's dollars and recieving you ROTH IRA tax free when you retire.

  2. You are correct in your assessment that it is generally a good idea to convert a traditional IRA to a Roth IRA. This really makes sense for younger folks who have time on their side and can grow their Roth IRA substantially over the years. It is also a great planning tool for older folks who do not anticipate needing the money when they are 70 1/2, so they can leave it in the Roth for as long as they want to without having to take Required Minimum Distributions. This will enable them to avoid any tax for a longer period of time and they can keep the account in tact to leave these funds to their heirs as part of their estate if they wish.

  3. You can also take advantage of the special provision in 2010 only to convert a traditional IRA to a Roth IRA without having to meet the $100,000 income limit. Plus, you'll get the option of paying the required tax from the conversion over two tax years (2011 and 2012) instead of all at once unless you choose to pay it all in 2011.