The Roth IRA was introduced in January 1998 as a result of the Taxpayer Relief Act of 1997.
The Roth individual retirement account (IRA) is a personal savings plan that offers tax benefits to encourage individuals to save for retirement. For 2008, you can contribute up to the lesser of $5,000 ($10,000 if you are married and filing a joint return) or 100 percent of your taxable compensation to a Roth IRA. In addition to the $5,000, individual’s age 50 or older can contribute an extra $1,000 for a total contribution of $6,000. All contributions to the Roth are not tax deductible, but the funds grow tax deferred and distributions are tax free under certain conditions.
To be able to contribute to a Roth IRA you must meet two requirements. The first requirement is that you or your spouse (if married) must have taxable compensation equal to the amount you contribute to the Roth. This taxable compensation could be in the form of wages or self-employment income. Second, your modified adjusted gross income for the year must not exceed certain limits. For the maximum contribution, the limits are $101,000 for single individuals and $159,000 for married individuals filing joint returns. The amount you can contribute is reduced gradually and then completely eliminated when your modified adjusted gross income exceeds $116,000 (single) or $169,000 (married filing jointly). You are also able to contribute to a Roth even if you participate in an employer-sponsored retirement plan, such as a 401(k).
When it comes to whether or not you should open a Roth IRA you should look at some of the strengths that the Roth offers. Some of these strengths would include:
- Qualified distributions are completely tax-free and penalty free.
- You can contribute after you reach age 70 ? as long as you have taxable compensation.
- You will have some flexibility in withdrawing your funds prior to retirement.
- You are not required to take distributions while you are alive.
- Contributions can be made even if you are covered by an employer-sponsored retirement plan.
- You can invest in a wide range of investments including mutual funds annuities, and CDs.
Along with the strengths of contributing to a Roth there are some weaknesses. Some of these weaknesses may include:
- You receive no tax deduction when you make a contribution (unlike a Traditional IRA)
- If your withdrawal is not a qualified distribution, the portion that represents earnings is subject to federal income tax.
- If you are age 59 — or younger you might be subject to a 10 percent early withdrawal penalty.
- If your modified adjusted gross income is too high you may not be able to contribute to a Roth.
Steven J. Bailey CFP®, CLU, ChFC is a registered representative of American Portfolios Financial Services, Inc. Member FINRA/SIPC, Advisory Services offered through American Portfolios Advisors, Inc., located at 992 E. State St. Salem and can be reached at 330-337-7720 or www.baileyfinancialplanning.com if you should have any further questions regarding this matter.