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Roth Advantages

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Roth Advantages

 

Roth IRAs are retirement savings plans offering “back-end” tax breaks: contributions aren’t deductible; but withdrawals are generally tax-free. Here’s how they work:

  • You can contribute to a Roth, whether you participate in an employer plan or not, if your AGI is less than $135,000 (joint filers, $199,000). Contributions phase out between $120,000 and $135,000 (joint filers, $189,000 through $199,000).
  • You can make a qualified rollover contribution to a Roth IRA regardless of your AGI.
  • You can contribute up to $5,500 annually to a Roth.
  • If you’re 50 or older, you can make “catch-up” contributions of up to $1,000 more.
  • You have to contribute cash. You can’t contribute securities from another account except for rollovers.
  • You can withdraw funds without taxes or penalties once you’ve reached age 59½ and held the funds in the Roth for five tax years after the year you make your first contribution.

Example: On April 15, 2018, you open a Roth IRA for the 2017 tax year. The 5-year period expires January 1, 2022.

  • Withdrawals within the first five years are treated first as contributions, then earnings. This lets you withdraw your contributions tax-free. Earnings are taxed as ordinary income, plus the usual 10% penalty if you’re under age 59½.
  • There are no required distributions from Roth IRAs as there are for ordinary IRAs. You can contribute at any age.
  • At death, your Roth passes to your designated beneficiaries without passing through probate. They can withdraw the entire balance, tax-free, or, if your custodian allows, withdraw it tax-free over their life expectancies.

Choosing between traditional and Roth IRAs depends mainly on whether you expect your tax rate to be lower today, when you fund the account, or tomorrow, when you take it out. If you expect your future rate to fall, choose the deductible IRA for up-front tax savings. If you expect your rate to hold steady, choose a deductible IRA if you can afford to invest your savings in a side fund. And if you expect your rate to climb, choose the Roth for tax-free income when the tax break saves more.

 

 

 

 

 

 

 

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