One of the most significant benefits of a Roth is tax-free growth. Contributions to a Roth IRA are made with after-tax dollars. However, the contributions grow in your account tax free. In addition, contributions may be withdrawn tax and penalty free from your account at any time, and for any reason. The earnings portion of your account may be withdrawn tax and penalty free after your account has been open for 5 years and one of the following applies:
- You have attained the age of 59 1/2
- In the event of disability
- In the event of death
- The distribution is used for a qualified first-time home purchase.1
Qualifications for a Roth IRA
You can contribute to a Roth IRA at any age, if you have earned taxable compensation and your modified earned taxable compensation and your modified adjusted gross income satisfies the following eligibility requirements.
Single Tax Filer:
- $95,000 or less: Full contribution
- Less than $110,000: Partial contribution2
- $110,000 or more: No contribution
Joint Tax Filer:
- $150,000 or less: Full contribution
- Less than $160,000: Partial contribution2
- $160,000 or more: No contribution
Contribution Limits
The Economic Growth and Tax Relief Reconciliation Act of 2001 provided for increased contribution limits for Roth IRAs. Contribution limits increase for 2005 through 2007 are $4,000 and $5,000 in 2008. In subsequent years, contributions are adjusted for inflation in $500 increments.
The Act also provides for additional contributions of $1,000 per year for individuals age 50 and older.3
Taking Distributions
Qualified distributions of account earnings may be taken if the Roth IRA has been open for at least 5 years and due to the occurrence of one of the following:
- Attaining the age of 59 1/2 or older
- Death
- Disability
- Qualified first-time home purchase1
In addition, unlike a traditional IRA, the Roth IRA does not require that you begin distributions at age 70 1/2. There are no mandatory distribution requirements for a Roth IRA and you won't pay any taxes or penalties on distributions as long as you hold the Roth IRA for at least five years and you're over 59 1/2 when you withdraw the money.
Roth Conversion
A conversion enables you to move balances from a traditional IRA to a Roth IRA. You will be required to pay ordinary income taxes, in the year of the conversion, on the portion of the converted balance that represents earnings and pre-tax contributions. Once you have converted to the Roth IRA, you can enjoy the benefits of tax-free growth and tax-free withdrawals assuming they are qualified distributions.
Qualifications for a Roth Conversion
Single and joint tax-filers with an adjusted gross income of $100,000 or less may choose to convert their traditional IRAs to take advantage of the many aspects of a Roth IRA. You are not limited to the amount of your conversion assets and may choose to make subsequent conversions in any year you are eligible.
The decision to convert a Roth IRA should be made carefully.