RETIREMENT - ROTH IRA CONTRIBUTIONS
 
 

With a Roth IRA contribution, your trade-off is simple: You pay taxes now in order not to pay taxes later. During all the years in between, your money will be growing with no tax burden.

v   If you’re older than age 54 ½ but plan to begin withdrawals at age 59 ½, then contributions to the Roth IRA will need to be left in longer to obtain the tax-free distributions of earnings. This is because, to qualify for tax-free distribution, the account must have been in existence for five years.

v   Even if distributions do not qualify for tax-free withdrawal, they will not be 100% taxable. Distributions are first non-taxable to the extent that they are a recovery of your original, taxed contributions. Only when the cumulative distributions exceed previously taxed contributions and conversions are the non-qualified distributions fully taxable.

v   This ordering rule makes even non-qualified distributions from a Roth IRA more favorable than other retirement funds, including regular IRAs. In all other retirement plans that contain previously taxed amounts and not yet taxed earnings, distributions are taxed under rules that require each distribution to be part taxable earnings and part tax-free return of investment. In other words, you cannot first withdraw amounts that are not subject to tax as you can with a Roth IRA.

v   With a regular IRA, once you reach age 70 ½, you must begin making annual withdrawals in certain minimum amounts. But with a Roth IRA, you can take out as little as you want as late as you want until your death. This allows for more tax-free growth while you’re alive. It also allows you to pass on more to heirs than a regular IRA, which can be an enormous benefit for two reasons: First, Roth IRAs are not subject to “income in respect of a decedent” (IRD), which is an income tax that is imposed on most other retirement plans if and when someone dies with any retirement plan investments. Second, if you leave the Roth IRA to a younger heir, it should be possible to “stretch out” the withdrawals over a longer period of time than a regular IRA.

v   Such a “stretch out” allows for astronomical growth. For example, if you left a Roth IRA with just $30,000 to a six-year-old grandchild, the tax-free distributions from it could total over $4 million. This can make the Roth IRA extremely valuable, even for a senior citizen.

v   Some tax experts are calling the Roth IRA the ultimate tax shelter. If you leave your Roth IRA to your spouse, it can be left intact until he or she dies, allowing for even greater tax-free growth.

v   Many retired people have income that is just below the level that would trigger a tax on their Social Security benefits. A Roth IRA may make it easier for them to stay below that level, because the withdrawals probably won’t be included in income.

v   Another advantage of a Roth IRA is that contributions can be made even after the age of 70 ½. Since the 1997 Taxpayer Relief Act of 1997 ended the 15% excise tax on large retirement plan accumulations and distributions and the minimum distributions rules that require distributions to begin at age 70 ½ do not apply to Roth IRAs, there is no drawback to accumulating as much money as you can in Roth IRA accounts.

For the latest information on Roth IRA contributions, click on http://www.rothira.com. This web site is a clearinghouse for the latest information on Roth IRAs, including links to other useful sites and links to web sites containing Roth IRA contribution calculators. These calculators will help you determine if a Roth IRA contribution makes sense for you.