The Roth IRA is an individual retirement account with some advantages over other IRS designated tax-deferred vehicles. There are several ways to set up, contribute and convert existing accounts to a Roth, and as with a Traditional IRA, rules must be carefully followed to avoid penalties. The Roth classification is designated for IRA’s and annuities set up through a life insurance company.
Eligibility
A Roth account follows the same rules as a Traditional version. The main difference is that in the former, Roth IRA contributions are taxed going in, and not coming out. In the latter, tax payments are deferred until the individual reaches the minimum distribution age of 59 ½. You are eligible for this retirement investment option so long as the AGI, (your gross income after adjustments) is no more than $176,000 as a couple. A single contributor is eligible if this same number is $120,000 or less.
Single filers are also those who file as ‘head of household’ and married couples who file a separate tax return, but have not lived in the same house during the year in question. Whether the Roth is set up as an annuity or ira, the maximum amount an individual can contribute in a fiscal year is $5,000 for people under fifty. Those over fifty get a bonus ‘catch-up’ contribution of $1,000, for a total of $6,000.
Roth IRA Contribution Limits
These numbers assume you are making more than $5,000-$6,000 a year. If the amount of earned and taxable income is less than or equal to these amounts, the individual can put it all into their Roth IRA. Another way to add funds to this savings plan is through a conversion or rollover. A conversion from a traditional ira to a Roth is treated as ‘rolling over’ for tax purposes. There is a limited time period to accomplish this without being penalized on the movement of cash.
Other types of rollovers include employer sponsored retirement plans; a government sponsored 457 plan or 403 annuity plans. You have sixty days to convert the funds to a Roth without the requisite 10 percent penalty. When converting from a traditional to a Roth, the money is still taxed as regular income for that year. The exception to this is moving funds from a Roth 401k to a retirement account of the same designation.
A benefit to choosing roth ira’s over traditional is the absence of a required minimum distribution age. Individuals are not forced to receive distributions from their retirement funds at the age of 70 ½ as with the traditional route. Roth IRA contributions can be made indefinitely, and the money can grow until the owner or designated beneficiaries decides to pull it out. Except under specific extenuating circumstances, the money cannot be accessed penalty-free until the owner reaches the age of 59 ½.
The IRS has made it easy to open or convert to the roth individual retirement account, and it has its advantages. When started early on, the taxed funds have time to compound until the minimum distribution age. When a person decides to convert to this fund later in life, they have the option to let it grow for as long as they like.
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