The Wonderful Roth IRA


For people with earned income (i.e. from employment), contributing to a Roth IRA offers potential for tax free growth and future tax free income.  Assuming that income taxes are likely to increase, benefits of the Roth IRA are tremendous.  Roth IRAs, were introduced in 1997 and named after former Senator William Roth Jr. who championed the idea of expanded IRAs. The contribution limits for 2007 which can be made up until tax filing deadlines is $4,000 for those under age 50 and $5,000 for those over age 50.  In 2008 those limits increase by $1,000 to $5,000 and to $6,000 respectively. 

In addition, owners of traditional tax-deferred retirement plans can convert those accounts into a Roth provided their annual adjusted gross income is less than $100,000 AND they are willing to pay the taxes on the amounts converted.  In 2010 the $100,000 limit is repealed and anyone will be able to convert to a Roth.  Converting in 2010 has another advantage.  The taxes due on a conversion in 2010 can be spread over two years and don’t have to be paid until 2011 and 2012.

The great thing about Roth IRAs is that all of the earnings are tax free.  (Keep in mind that contributions to a Roth are not tax deductible and you must be at least 59 ½ years old and have had a Roth for a minimum of five years for tax free distributions.) 

Another benefit of the Roth is that there are no minimum distributions required at age 70 ½ as there are in traditional deferred plans.  This means that at death, a Roth owner could pass their Roth to their spouse tax free.  At the spouse’s death, any unused portion in the Roth could then be passed to their beneficiaries.  A non-spouse beneficiary would have to begin taking distributions but they would still be tax free and could be stretched over the beneficiaries’ life allowing the Roth to continue to grow tax free during the distribution phase.

Couples with 2007 modified adjusted gross incomes over $156,000 begin to lose the ability to make Roth contributions ($99,000 for Single filers).  In 2008 those limits increase.  However, since congress is removing the income limits for converting to a Roth, they have created a way for high income filers to own a Roth.  For example, a person with income too high to make a Roth contribution may want to consider making contributions to a traditional IRA (either deductible or non-deductible) for the next few years.  Then in 2010, when the income limits are removed, the traditional IRA can be converted to a Roth.

As with anything that has to do with the IRS, there are additional exceptions and limitations and tax consequences.  And since each situation is unique, be sure to consult with your financial advisor and/or tax advisor to determine if this may be of benefit to you. 

Written By Kimber Heaton CFP