What You Should Know About a Roth IRA

You will soon start hearing more about IRAs as we approach tax season. For individuals who need a tax deduction, an IRA makes a great solution to this problem, although there are limits. Many people max these limits out for maximum deductions and the nice thing about it is that you have up until April the 15th to make the contribution and it can still be used on the previous year’s income tax as a deduction. This is how a traditional IRA differs from a Roth IRA.

There is a lot of information about methods of saving and investing. It seems like they are always coming out with new investment vehicles. That is what a Roth IRA is-a way of saving money. A Roth IRA is an investment plan that has some special features that can not be found in any other type of savings plan. The Roth IRA was introduced in 1997 and was named after Senator William V. Roth, Jr.

The Roth IRA does not allow tax deductions for contributions. There are curtained qualified conditions that will allow you or your beneficiaries to make tax free withdrawals. Another advantage is not having to pay early withdrawal penalties on qualified withdrawals and there is no mandatory distribution after 70 ½.
The big advantage of the Roth IRA is that it is completely tax free, but you must understand that you do not get a tax deduction for your contributions. Your individual situation will determine whether the Roth IRA or the traditional IRA will fit into your savings plan better.

There are certain requirement s you have to meet to be able to contribute to a Roth IRA. If you filed a joint return and your income did not exceed $150,000 or if you are single and your income did not exceed $95,000, you are able to contribute $4,000 annually and $5,000 if you are over the age of 50. The other requirement is that you must have a minimum income of whatever the amount is that you are contributing to your Roth IRA. If your income exceeds the $150,000 joint filing and $95,000 single filing figure, the amount you can contribute is gradually reduced as you approach the $110,000 figure for singles and $160,000 for joint returns.

You also have the ability to convert a traditional IRA to a Roth IRA if you are single or filed jointly with your spouse. You also have to have an adjusted gross income of not more than $100,000. The year of the conversion, you will be responsible for taxes.

Roth IRAs do have special circumstances where the money can be withdrawn early with no early withdrawal consequences. If you are a first time home buyer, you can withdraw $10,000 tax free as a down payment for you home purchase. Tuition expenses can be withdrawn tax free from you Roth IRA along with money to cover catastrophic medical expenses.

There are many advantages to having a Roth IRA. Roth IRAs can be purchased through most reputable personal finance companies. They are a great way to save for retirement or for a child’s college education. A Roth IRA should be part of every portfolio.

Roth IRA Rules

A Roth IRA is a unique type of savings plan that is one of the newer financial vehicles that can be used to save for retirement, a down payment for a first-time home purchase or education expenses. But Roth IRA Rules state how the money can be withdrawn tax-free from this type of savings plan.

There are really 2 sets of rules when it comes to withdrawing your contributions without having to pay taxes or penalties. The first set is as follows:
1. The distribution must be made on or after the date you become age 59 1/2; or
2. Made to your beneficiary, or to your estate, after you die; or
3. Made to you after you become disabled within the definition of the IRS code; or
4. Used to pay for qualified first-time homebuyer expenses.
The other rule is that the withdrawal cannot be made after the five-tax-year period to be considered qualified.

If you are considering opening a Roth IRA, it is important that you understand the Roth IRA rules. In the event that you would need a distribution, these Roth IRA rules would apply.

While a Roth IRA is an investment vehicle, it is reassuring to know that the money is available if you need it in case of an emergency. A Roth IRA is just one part of a diversified portfolio and is a great way to save for a child’s education.

Roth IRA Calculator

A Roth IRA is a great way to save money for retirement. The money that is deposited in a Roth IRA can be used tax-free for other expenses, as well. This makes this savings option very versatile. A Roth IRA Calculator can be helpful in determining the viability of converting a traditional IRA to a Roth IRA and there are also Roth IRA Calculators that will calculate you post-tax income from a Roth IRA.

Using a Roth IRA calculator is an excellent tool for planning for your future. These calculators are available on the internet on calculator sites and most major investment sites also contain a variety of calculators.

Here are some questions that people often need the answers to as they are contemplating making IRA investment decisions.

Can an IRA be rolled over into a qualified retirement plan (e.g., 401(k), profit-sharing, etc.)?
An IRA can be rolled over into a qualified retirement plan, assuming the qualified retirement plan has language permitting such rollovers.

Can an IRA accept rollovers from a qualified retirement plans?
Provided the IRA document permits rollovers, almost any type of plan distribution can be rolled over into it.

Are in-service distributions allowed from an IRA-based plan (e.g., SEP, SARSEP or SIMPLE IRA plan)?
There are no prohibitions on distributions from IRA-based plans. A participant can take distributions at any time. However, in addition to the distribution being taxable, it may be subject to a 10% additional tax if the participant has not reached age 59 1/2. If the distribution is taken in the first 2 years of participation in a SIMPLE IRA plan, the additional tax is increased to 25%.

Are hardship distributions allowed from an IRA-based plan?
As in-service distributions are allowed, so are “hardship” distributions, subject to the same conditions.

Must distributions be made to IRA-based plan participants who are over age 70 1/2, if they are still working? What about to the owner of the company?
Both the owner and any employees over age 70 1/2 must take required minimum distributions. Unlike qualified plans (e.g., 401(k), profit-sharing, etc.), there is no exception for non-owners who have not retired.

These are just a few of the questions that an individual may have as they are making decisions about the retirement and investment portfolio. Both Traditional and Roth IRAs should be part of any diversified portfolio.