|
 |
|
IRA
The Roth IRA |
The Roth IRA is named after
Senator William Roth of Delaware who first sponsored the bill in 1997, the year the
Taxpayer Relief Act was passed. The new savings account is often referred to as a
"backloaded IRA" because the tax break comes at the end of the plan instead of
the beginning.
The Roth IRA is similar to a Traditional IRA:
- You must have earned income
to contribute to the plan.
- The maximum amount you can
put in is still $2,000.
- Earnings grow tax-deferred.
- Contributions can be made
for a spousal IRA.
In many ways the Roth IRA
is different:
- Withdrawals are completely
tax-free after age 59 1/2 and as long as your money has been in at least five years.
- Contributions are not
tax-deductible.
- You can contribute to a Roth
IRA even after age 70 1/2 as long as you're still working.
- There is no required
distribution age or minimum withdrawal schedule.
- Your Roth IRA will pass to
your heirs tax-free if you should die.
Let's take a look at some
of the features that comprise a Roth IRA.
Contributions
Anyone under age 70 1/2 who earns employment income or is married to someone who does can
contribute to a Roth IRA. And with the Roth IRA, contributions are allowed after age 70
1/2 provided you're still employed and earning income.
The annual limit on a contribution is $2,000 or 100% earned income, whichever is less.
Contributions can be made as lump-sum payments or as periodic payments throughout the year
(such as dollar-cost averaging).
As long as you have earned income, there is no minimum age for contributing to a Roth IRA.
So if your 12-year daughter has compensation from babysitting, for example, she qualifies
for this rule. Think how much your child's IRA would be worth by retirement if she started
contributing this early. One $2,000 investment would grow to more than $300,000 by age 65
assuming a 10% annual return, and to more than $800,000 using a 12% return. And when that
money is withdrawn, it'll be tax-free.
Roth IRA contributions are not tax-deductible. You do not enjoy the same up-front tax
savings that may be available with a Traditional IRA.
Contributions to a Roth IRA may be limited depending on your modified adjusted gross
income (AGI) and filing status. If your AGI exceeds a certain limit, you can't contribute
to a Roth IRA -- period. Use the following phase-out schedule to determine how much you
can contribute:
| |
Full |
Partial |
None |
Single |
$95,000 |
$95,000-$110,000 |
$110,000 |
Married |
$150,000 |
$150,000-$160,000 |
$160,000 |
*Married couples who file separate
tax returns may not contribute to a Roth IRA.
MORE » |
