Roth IRA’s – tax free income in retirement
Mr. Roth got it right
The Roth IRA provides more flexibility to retirement savers
While most people are familiar with the traditional IRA that was created in 1974, it has only been in recent years that news of the Roth IRA has created awareness and excitement for that retirement savings vehicle.
The Roth IRA, named after its champion Sen. William Roth of Delaware, was passed into law in 1997. The Roth IRA differs from the traditional IRA in a couple of key ways. Compared to the traditional IRA, the Roth does not offer a tax-deduction up front. Remember that those who use a traditional IRA, if eligible, can take a tax deduction at the time they fund their IRA and then pay taxes on withdrawals.
The Roth works differently.
What the Roth IRA does offer is the potential for tax-free income once it has been held for five years and the owner reaches 59 ½ at the time of withdrawal. That’s great news, because it means that the Roth does not produce a tax burden when you least need one; after your income producing years are over.
Roth IRA requirements and benefits
The five year holding period is an important requirement to understand with the Roth IRA. It is the minimum period that funds need to be deposited in the Roth account before a qualified distribution (not subject to tax or penalty) can take place. This is referred to as the five-tax-year period. The rule applies to funds deposited into the Roth through a conversion from a traditional IRA and funds contributed directly to the Roth IRA.
Other important benefits derived from a Roth IRA are the ability to make contributions after you reach age 70 ½ and the ability to leave amounts in a Roth IRA as long as you live. Neither of these benefits are features of a traditional IRA.
Your modified adjusted gross income (MAGI) determines if you can contribute the full amount to a Roth IRA, a reduced amount or no amount. The amount is also determined by your filing status. For instance, in 2008, if your MAGI exceeded $166,000, you could not make a Roth IRA contribution.
The Roth concept is extended to the 401k
The newest retirement savings product to proudly wear the Roth name is the Roth 401(k), which first became available in January of 2006. The Roth 401(k) combines features of the original 401(k) plan with the attractive benefits of the Roth IRA. Investments into the Roth 401(k) are with after-tax dollars, but the earnings accumulate tax-free* and the income from the Roth 401(k) can be removed tax-free if held for five years.
Those who are self-employed can take advantage of an individual Roth 401k plan. It offers the advantages of the group plan plus additional flexibility and choice.
Learn more about how an individual Roth 401k can help you.
*you must have reached age 59 ½ or there must be a qualifying event
To best understand the legal and tax aspects of a Roth 401k or any investment product, consultation with a qualified tax or legal professional is suggested. None of the information found on this web site is meant to replace the competent legal, tax or financial advice of a professional.
