Copyright
2008 Martin Katrein Jr.
http://www.RetirementConsultingServices.com
A
ROTH IRA is a nondeductible IRA that offers significant tax and retirement planning
advantages.
- Tax free withdrawals of contributions may be made at any
time and earnings may be withdrawn tax free after a five-year holding period by
an individual who is age 59½ or older.
- Mandatory required
minimum distributions at age 70 ½ are not required from a ROTH IRA. Consider
your tax planning alternatives for controlling your cashflow.
- For
years 2008 and 2009, a conversion from an IRA, SEP IRA, or SIMPLE IRA to a ROTH
IRA is allowed if your modified adjusted gross income (MAGI) is $100,000 or less.
Starting in 2010, there are no income limits for ROTH conversions. Married taxpayers
filing joint returns with MAGI less than $100,000 in 2008 would be between the
10% and 25% marginal tax brackets. With the uncertainty concerning our federal
deficit and future income tax rates, will your marginal tax rate ever be less?
One of the most important considerations is what will tax rates be in the future?
- Since ROTH IRA contributions and conversions have already been
taxed, it will pass income tax free to your beneficiaries, regardless of their
future income tax rates. A spousal beneficiary may treat the ROTH IRA as their
own and have no required distributions. For a non-spouse beneficiary (children),
required minimum distributions must begin by the end of the year following the
year of the ROTH IRA’s owner’s death.
There
are two ways in which you may establish a ROTH IRA. First, you may make annual
nondeductible contributions. Secondly, you may convert an IRA, SEP-IRA, or SIMPLE
IRA to a ROTH IRA. Currently, both alternatives are subject to an income limitation.
If you do not have an existing ROTH IRA, you may wish to establish one as soon
as possible to start the five-year rule to withdraw ROTH IRA earnings.
Simply
stated, you can withdraw your original contributions to a ROTH IRA at any time
with no tax or penalty. In order to withdraw the earnings tax free, you must satisfy
the five-year holding period which begins with January 1 of the first year for
which any ROTH IRA contribution is made. If you open a ROTH for 2008, the five-year
clock would start January 1, 2008 and end December 31, 2012 However, you also
have to turn 59 ½ years old to avoid a 10% penalty for early withdrawals
on any earnings, along with the income tax on the earnings.
The
five-year rule works a little differently for assets you convert to a ROTH IRA.
Each conversion has its own five-year clock. You have to hold those converted
assets for five years or until you reach 59½, whichever comes first. Then
you can withdraw the converted amount tax free and without penalties. However,
to withdraw the earnings tax-free, you have to hold the ROTH IRA for five years
and be at least 59½.
In summary, ROTH IRAs can offer
significant tax advantages if you have large retirement accounts, worry about
higher income tax rates later or desire to pass tax free assets to children. Since
there are more rules and exceptions than explained above, please see IRS Publication
590. It is the most comprehensive source of information about IRAs.
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