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In this section we present you with short newsletters containing
timely and useful information. |
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To Roth or Not To Roth? That is the IRA Question! |
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For many taxpayers, the Roth IRA is one of the best tax-advantaged
retirement plans around. Find out if you’re eligible to harvest the
grapes of Roth, and whether a Roth IRA or a traditional IRA is right
for you. We answer the questions that our clients frequently ask. |
Choosing between the Roth IRA and a traditional IRA can be
difficult, and it's a big decision. We'll answer the questions we
encounter most frequently here, but if you would like any additional
information, please contact our office.
The Roth IRA is a relatively new retirement vehicle, first available
in 1998. Not all taxpayers can get full benefit from a Roth IRA,
because of rules called "income phase-out limitations." For single
taxpayers, the Roth benefit is limited if adjusted gross income
exceeds $95,000. . . for joint filers, limitation begins at
$150,000. Married persons filing separately begin losing the benefit
with the first dollar of income. In each case, a phase-out range
allows a reduced benefit until income reaches a maximum amount.
If you're single and your adjusted gross income exceeds $110,000,
you cannot contribute to a Roth IRA. You could, of course,
contribute to a traditional IRA. On the other hand, if you're a
single filer and your income falls below the $95,000 adjusted gross
income limit, you can make the full maximum annual $3000
contribution to a Roth IRA. A special "catch-up" contribution can be
added to that limit if you've passed your 50th birthday. If your
income falls somewhere between this $95,000 - $110,000 range, as a
single taxpayer you are eligible to make a partial Roth IRA
contribution. The same logic applies to joint filers, subject to the
$150,000 - $160,000 phaseout limitations.
Contributions to a Roth IRA are never deductible. However, all the
money in a Roth IRA account may be withdrawn completely tax-free if
you comply with "qualifying distribution" rules. By contrast,
contributions to a traditional IRA may or may not be deductible and
therefore may or may not be withdrawn tax free in accordance with
the "qualifying distribution" rules.
Whether or not you can deduct contributions to a traditional IRA
depends on your income level. For tax year 2003, single taxpayers
who are covered by an employer's retirement plan can make deductible
IRA contributions subject to an adjusted gross income phaseout range
of $40,000 and $50,000. For married taxpayers filing jointly, an
adjusted gross income phaseout range of $60,000 and $70,000 applies
in 2003 if an IRA participant is covered by an employer plan. The
phaseout range for an IRA participant who is not covered by a plan
but whose spouse is covered is $150,000 - $160,000 of income in a
joint return.
What do these rules mean? If you're single and your adjusted gross
income exceeds $50,000 in 2003, you cannot deduct any portion of
your maximum $3,000 traditional IRA contribution. You can still
contribute the $3,000 annual maximum to an IRA, but your entire
contribution will be nondeductible. The same logic applies to joint
filers, subject to the limitations described above.
So is the Roth better than the traditional IRA? That depends. For
taxpayers that are only allowed to make nondeductible IRA
contributions, the Roth IRA is clearly preferable. That's because
contributions to a Roth IRA may be withdrawn tax-free as "qualifying
distributions." Qualifying distributions will also not be subject
the 10% early withdrawal penalty tax.
To satisfy the qualifying distribution rules you must not draw from
the Roth IRA for the first five years and meet one of six other
requirements:
1) The distribution is made after you reach age 59 ˝.
2) The distribution is paid because of your death or disability.
3) The distribution consists of substantial equal periodic payments.
4) The distribution is used for qualifying medical or health
insurance expenses.
5) The distribution is used for higher education expenses.
6) The distribution is used for a first home purchase and is limited
to $10,000
Taxpayers with existing traditional IRA accounts can choose to
rollover their IRAs into Roth IRAs. That means paying taxes now so
you don't have to pay them later. Whether you should do this depends
on many factors that are unique to your own situation. It also
requires highly complex "what if" computations that can only be
handled by a computer and a skilled tax professional. In fact,
different software programs sometimes give different answers, so you
really have to be both a tax and computer expert to do this
important analysis correctly! We are happy and ready to help. Please
don't hesitate to Contact Us
if you have any questions.
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