Roth IRAs – The Basics

An Individual Retirement Account (IRA) is a savings plan that allows you to defer taxes on the income you earn until retirement age. The two most popular types of IRAs for individual investors are Roth and Traditional. These IRAs have some important differences, especially when it comes to income limits and tax benefits. Get a detailed comparison of Roth and Traditional IRAs.

In a Roth IRA, you make contributions on an after-tax basis, and any earnings grow free of federal taxes, which means you don’t get a tax deduction now, but you won’t need to pay taxes on the earnings later.

A Traditional IRA’s key advantage is tax deferral, while possible deductibility means the potential for tax savings today. Any earnings you make may grow tax deferred until retirement. You may be able to deduct your contributions from your current taxes. Learn more about Traditional IRAs.

The following is an overview of the Roth IRA.  Before establishing any type of IRA, we encourage you to consult with your tax advisor to ensure that the type of IRA selected by you is appropriate for your circumstances.

What is a Roth IRA? Roth IRAs differ from other tax-favored retirement plans, including other IRAs (called “traditional IRAs”), in that they offer the owner the opportunity to exempt  distributions from taxation.   Roth IRAs are funded with after-tax dollars so while the contributions are not tax deductible, earnings on the contributions accumulate without tax and distributions may be received tax-free, subject to satisfying certain IRS rules.

Eligibility. Individuals whose income does not exceed certain modified adjusted gross income (MAGI) limits may contribute to a Roth IRA. The MAGI limit is derived by taking your adjusted gross income from your tax return and adding back certain deductions and adjustments.

Single taxpayers with MAGI of up to $95,000 or married couples filing jointly with adjusted gross income of up to $150,000 are eligible to contribute the full $4,000 annually to a Roth IRA.  Workers who will be age 50 or older before 2007 may contribute an additional $1,000 to a Roth IRA in 2006, for a total of $5,000, so long as the contributions are made only to a Roth IRA.

The contributions amount is gradually reduced to zero for adjusted gross income levels between $95,000 and $110,000 for single taxpayers, and between $150,000 and $160,000 for married couples.

Unlike traditional IRAs, contributions to a Roth IRA can be made after age 70 ½.

Deductibility. Contributions to a Roth IRA are not tax deductible.  Instead, the tax advantage of the Roth IRA is that earnings on the contributions accumulate without tax and distributions may be received tax-free.

Distributions.  No tax due on distributions from a Roth IRA if the funds are held in the Roth IRA account for at least five years and you are at least age 59 ½ at the time of the distribution. The total amount of annual contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time.  Unlike traditional IRAs, there is no requirement that mandatory withdrawals from a Roth IRA begin at age 70 ½.