Is a Roth IRA for You?

• Author: Lizzio, Joseph P.
• Position: Retirement savings - Brief Article

THE ROTH INDIVIDUAL RETIREMENT ACCOUNT, created under The Taxpayer Relief Act of 1997, offers investors still another alternative for building savings for retirement. The Roth IRA has several attractive features, such as:

Generous eligibility rules. Individual wage earners may contribute up to $2,000 per year to a Roth IRA. Those eligible to contribute the full $2,000 a year are single taxpayers with annual modified adjusted gross income (AGI) up to $95,000 and couples falling jointly with up to $150,000 of modified AGI. (The term "modified AGI" is the taxable amount on your IRS 1040 form after certain adjustments.) The contribution amount gradually is reduced to zero at modified AGI levels between $95,000 and $110,000 for single taxpayers and between $150,000 and $160,000 for couples. Unlike the traditional IRA, a Roth IRA allows contributions after an individual reaches age 70.5 as long as the individual or individual's spouse has earned income.

Non-deductible contributions. The distinguishing features of the Roth IRA, when compared to a traditional IRA, are that contributions to a Roth are made on a non-deductible basis and the tax benefit is realized when funds are withdrawn.

Tax-deferred accumulation of earnings and tax-free withdrawals. Earnings accumulate on a tax-deferred basis and may be withdrawn tax-free if the withdrawal occurs more than five years after the account was opened and the individual is at least 59.5, is disabled, has died, or the funds are used to purchase a first home. (There is a $10,000 lifetime limit on withdrawals for first-time home buyers.)

Flexible, penalty-free withdrawals. Like the enhanced traditional IRA, the Roth IRA can be used not only for retirement, but to help fund other critical needs, such as a college education. For withdrawals prior to age 59.5, the 10% premature withdrawal penalty will be waived if the funds are used to pay expenses for qualified higher education, first-time home purchase, disability, certain medical situations, or is due to death.

Individuals may have both a traditional IRA and a Roth IRA, but may not contribute more than a combined total of $2,000 per year to these accounts. Individuals who are not eligible to make deductible contributions to a traditional IRA or to make contributions to a Roth IRA still may make non-deductible contributions to a traditional IRA.

The law also provides an opportunity to convert an existing IRA to the Roth IRA. Look closely at whether you are...