In saving for retirement, one of the most popular and best tools is the ROTH IRA (Individual Retirement Account). The ROTH IRA is different from the conventional IRA in that you invest post-tax money (money you were already taxed on) in the ROTH IRA and when you withdrawal the money, it is tax free (providing the account has been opened for at least 5 years for principal withdrawals and the owner's age is at least 59 ½ for withdrawals on the growth portion above principal)
Current deposit limits of a ROTH are as follows:
YEAR Under 50 Over 50
2008 $5000 $6000
2009 $5000 $6000
Starting in 2009, contribution limits will be assessed for a potential increase (in $500 increments) based on inflation, though the 2009 contribution limits have remained unchanged.
There are income limits established for contributing to the ROTH IRA:
Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)
Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution)
Married filing separately (if the couple lived together for any part of the year): $0 (to qualify for a full contribution); $0-$10,000 (to be eligible for a partial contribution).
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. This law made permanent increased contribution limits to IRAs (including Roth IRAs) that would otherwise have expired after 2010. It also made permanent the Roth 401(k), which would otherwise not have been available after 2010.
Advantages of a ROTH IRA:
- Direct contributions to a Roth IRA (i.e., not including rollovers) may be withdrawn at any time with no tax or penalty, since they have already been taxed.
- Up to $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence. This house must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives such a distribution must not have owned a home in the previous 24 months.
- Contributions may be made to a Roth IRA even if the owner participates in another qualified retirement plan such as a 401(k).
Disadvantages of a ROTH IRA:
Contributions to a Roth IRA are not tax deductible. By contrast, contributions to a traditional IRA are tax deductible (within income limits). Therefore, someone who contributes to a traditional IRA instead of a Roth IRA gets an immediate tax savings equal to the amount of the contribution multiplied by their marginal tax rate while someone who contributes to a Roth IRA does not realize this immediate tax reduction.
Congress may change the rules that currently allow for tax free withdrawal of Roth IRA contributions. Therefore, someone who contributes to a traditional IRA is guaranteed to realize an immediate tax benefit, whereas someone who contributes to a Roth IRA must wait for a number of years before realizing the tax benefit, and that person assumes the risk that the rules will be changed during the interim.
Current deposit limits of a ROTH are as follows:
YEAR Under 50 Over 50
2008 $5000 $6000
2009 $5000 $6000
Starting in 2009, contribution limits will be assessed for a potential increase (in $500 increments) based on inflation, though the 2009 contribution limits have remained unchanged.
There are income limits established for contributing to the ROTH IRA:
Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)
Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution)
Married filing separately (if the couple lived together for any part of the year): $0 (to qualify for a full contribution); $0-$10,000 (to be eligible for a partial contribution).
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. This law made permanent increased contribution limits to IRAs (including Roth IRAs) that would otherwise have expired after 2010. It also made permanent the Roth 401(k), which would otherwise not have been available after 2010.
Advantages of a ROTH IRA:
- Direct contributions to a Roth IRA (i.e., not including rollovers) may be withdrawn at any time with no tax or penalty, since they have already been taxed.
- Up to $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence. This house must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives such a distribution must not have owned a home in the previous 24 months.
- Contributions may be made to a Roth IRA even if the owner participates in another qualified retirement plan such as a 401(k).
Disadvantages of a ROTH IRA:
Contributions to a Roth IRA are not tax deductible. By contrast, contributions to a traditional IRA are tax deductible (within income limits). Therefore, someone who contributes to a traditional IRA instead of a Roth IRA gets an immediate tax savings equal to the amount of the contribution multiplied by their marginal tax rate while someone who contributes to a Roth IRA does not realize this immediate tax reduction.
Congress may change the rules that currently allow for tax free withdrawal of Roth IRA contributions. Therefore, someone who contributes to a traditional IRA is guaranteed to realize an immediate tax benefit, whereas someone who contributes to a Roth IRA must wait for a number of years before realizing the tax benefit, and that person assumes the risk that the rules will be changed during the interim.