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Traditional and Roth IRAs
Saving and
investing for retirement is a central goal in an individual
financial program and should include an evaluation of the
ultimate impact of both ordinary income taxes and estate taxes
on retirement assets. Even with the numbers in hand, personal
needs and preferences will influence your final decision.
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| You may have
received a great deal of information on the new Roth IRA and
other new IRA options, from numerous sources. These new IRA
changes are major benefits of the Taxpayer Relief Act of 1997,
passed by Congress and signed into law by the President. But are
you still a bit confused about what’s best for you? Here’s a
quick overview, straight from the IRS.* First, the main point of the Roth IRA is
that you don’t pay income tax when you withdraw the money—not even
on the gains, dividends and interest that build up—if you are age
59½, and the account has been open for five years. Tax-free withdrawals
are also allowed for first-home purchase ($10,000 lifetime cap), or upon
death or disability. Again, the five-year requirement applies. You can’t
deduct a Roth IRA contribution from your taxable income, but it’s an
excellent choice for future tax savings. |
Traditional IRA
Roth IRA
SEP & SIMPLE Plans
Education IRA's
I'd Like More Information!
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Roth IRAs And Traditional IRAs
Now you can convert funds to a Roth IRA from a traditional IRA to
save taxes on future interest.
The taxable portion of the money withdrawn from your traditional IRA
must be included in your taxable income for the year of the conversion.
However, you are exempted from paying the 10% additional tax on early
withdrawal. This conversion is not allowed if your Modified Adjusted
Gross Income is over $100,000, or if your status is married filing
separately. (For more information see Final
Roth IRA Regulations - Treasury Decision 8816 (February 3, 1999)
You don’t pay tax on a Roth IRA for qualified distributions. Not
even on future gains.
A traditional IRA is still a top choice for immediate tax savings.
You’re probably familiar with the benefits. If you qualify, you can
deduct your contributions to this type of IRA from taxable income, and
save on taxes the same year. Generally, you don’t pay tax until you
make withdrawals—usually after retirement—but then, unless you made
non-deductible contributions, the total amount withdrawn is included as
income.
A Roth IRA—unlike a traditional IRA—has no age "70½ "
rule.
You can make contributions to a Roth IRA at any age if you have
taxable compensation. And the traditional IRA requirement that you start
making withdrawals at age 70½ does not apply to a Roth IRA.
Roth IRAs and traditional IRAs contribution limits.
If contributions are made to both Roth IRAs and
traditional IRAs established for your benefit, your contribution limit
for Roth IRAs generally is the same as your limit would be if
contributions were made only to Roth IRAs, but then reduced by all
contributions (other than employer contributions under a SEP or SIMPLE
IRA plan) for the year to all IRAs other than Roth IRAs.
This means that your contribution limit is the lesser of:
However, if your modified AGI is above a certain amount, your
contribution limit may be reduced, as explained under
Contribution limit reduced.
Note.
The $3,000 and $3,500 amounts do not increase for 2004.
NOTE:
President Bush signed into law on 6/7/01 the tax bill that Congress passed on 5/26/01. The new law includes major pension changes. Provisions include phased-in contribution limits for IRAs and Roth IRAs: $3,000 in 2002, $4,000 in 2005, $5,000 in 2008 with limits indexed in future years. IRA catch-up provisions will increase those limits for those 50 and older by $500 in 2002 and by $1,000 starting in 2006.
You can still roll over money from an employer’s qualified
retirement plan to a traditional IRA, but you cannot convert such funds
directly to a Roth IRA.
The world of retirement investing has become more complex. There are
many mutual fund companies, as well as other financial services
organizations and professionals who can help you decide which strategy
is best for you. The key is to
do something! The sooner you
start investing for your future retirement, the more comfortable it will
be!
