| With all you've
heard about Roth IRAs, deductible IRAs, non-deductible IRAs are you a bit confused
about what's best for you? Here's a quick overview, straight from the IRS. First,
the main point of the Roth IRA is that you don't pay income tax on qualified withdrawals
not even on the gains, dividends and interest that build up if you are age 59
1/2, and the account has been open for five years. Tax-free withdrawals are also
allowed for first-home purchase ($10,000 lifetime cap) or upon death or disability.
Again, the five-year requirement applies. You can't deduct a Roth IRA contribution
from your taxable income but it's an excellent choice for future tax savings. Roth
IRAs And Traditional IRAs You can convert money to a Roth IRA from a traditional
IRA to save taxes on future earnings. The taxable portion of the money
withdrawn from your traditional IRA must be included in your taxable income for
the year of the allowable conversion. However, you are exempted from paying the
10% additional tax on early withdrawal. This conversion is not allowed if your
Modified Adjusted Gross Income is over $100,000, or if your filing status is married,
filing separately.
| You don't pay tax on a Roth IRA for qualified
distributions. Not even on future gains. | A
traditional IRA is still a top choice for immediate tax savings. You're
probably familiar with the benefits. If you qualify, you can deduct your contributions
to this type of IRA from taxable income, and save on taxes the same year. Generally,
you don't pay tax until you make withdrawals - usually after retirement. But then,
unless you made non-deductible contributions, the total amount withdrawn is included
as income. A Roth IRA-unlike a traditional IRA-has no "age 70 1/2"
rule. You can make contributions to a Roth IRA at any age if you have taxable
compensation. And the traditional IRA requirement that you start making withdrawals
at age 70 1/2 does not apply to a Roth IRA. Qualifications for the Roth
IRA: The maximum Roth IRA contribution of $2,000 per year is allowed for
individuals of any age with taxable compensation and Modified Adjusted Gross Income
below $150,000 for married filing jointly; $95,000 for a single taxpayer, head
of household, or married filing, separately (if you did not live with your spouse
at any time during the year); or $10,000 for married filing separately (who lived
together during the year). This maximum phases out between $150,000 to $160,000
for married filing jointly, or $95,000 to $110,000 for a single taxpayer, head
of household, or married filing separately (if you did not live with your spouse
at any time during the year). For married individuals filing separately, who lived
together during the year, the phase-out is from $0 to $10,000. Participation
in an employer's retirement plan does not affect your eligibility for a Roth IRA. Note:
- Total contributions to all traditional and Roth IRAs, other than
employer contributions, cannot exceed $2,000 per taxpayer per year.
- You
can still roll over money from an employer's qualified retirement plan to a traditional
IRA, but you cannot convert such funds directly to a Roth IRA.
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