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 A Roth IRA allows only nondeductible contributions but features tax-free (the term tax-free means free from federal income taxes) withdrawals for certain distribution reasons after a five-year time period.
Original contribution amounts are returned first. Thus, if you contribute $2,000 and it grows to $3,000 then you need some money and take $2,000 out, there are no taxes or penalties, no matter your age or how long you have had the account opened. YOU CAN ALWAYS GET YOUR PRINCIPAL TAX AND IRS PENALTY FREE;
You never have to take distributions if you do not need to, unlike Traditional IRA's which require distributions beginning at 70 1/2.
You can pass a Roth IRA to your beneficiaries at death and they get it income tax free;
Traditional IRA's can be converted into a Roth IRA. For many people this is a terrific option that can lead to many more dollars at retirement.
There are many rules to the Roth IRA. Contact us to learn more about this fascinating new investment option.
There are two requirements for eligibility to contribute to a Roth IRA: You must have earned income (or your spouse must have earned income) and your modified adjusted gross income (MAGI) cannot exceed certain limits (see MAGI chart below)
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Your contribution amount each year is either the lesser of 100 percent of your earned income or the maximum contribution amount (MCA), if your MAGI is within prescribed limits as shown in the MAGI chart below. Maximum contributions are shown in the Tax Limit chart also shown below.
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No, provided your earnings you take are part of a qualified distribution. This is what is so great about a Roth IRA. Unlike a traditional IRA, you can’t take a tax deduction for any of the contributions made to a Roth IRA. However, you will pay no taxes on any of the earnings that your contributions have generated when you are ready to make a withdrawal.
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For tax-free earnings on your Roth IRA, you must first meet a five-year holding period. This begins with the tax year your first contribution is made. After that, any earnings withdrawn for a qualified distribution reason are income tax free and penalty tax free.
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For nonqualified distribution, original contribution amounts are return first. Contribution are not subject to taxation or the 10% premature-distribution penalty tax when distributed. What this means is you can always withdraw your principal income tax free and penalty tax free for any reason.
Contribution Limits Chart
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Tax Year
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Contribution Limit
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Catch-Up
Contribution Limit
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Contribution Limit for
Age 50 and Older
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2007
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$4,000
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$1,000
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$5,000
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2008
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$5,000
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$1,000
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$6,000
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2009 and beyond
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$5,000 + COLA
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$1,000
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$6,000 + COLA
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This table shows aggregate amount you can contribute to a Roth and/or Traditional IRA for each year.
MAGI (Modified Adjusted Gross Income) Chart
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Single head of household, or married filing separately and you do not live with your spouse at any time during the year
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2007
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$99,000 or less
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$99,000 - $114,000
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$114,000 or more
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2008
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$101,000 or less
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$101,000 - $116,000
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$116,000 or more
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Married filing jointly or qualifying widow(er)
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2007
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$156,000 or less
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$156,000 - $166,000
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$166,000 or more
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2008
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$159,000 or less
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$159,000 - $169,000
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$169,000 or more
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Married filing separately and you lived with your spouse at any time during the year
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2007
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$0
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$0 - $10,000
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$10,000 or more
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2008
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$0
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$0 - $10,000
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$10,000 or more
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* Consult your tax advisor regarding potential tax savings.
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