Named for its congressional sponsor, the Roth IRA touts the potential for tax-free earnings (as opposed to the traditional IRA's "tax-deferred" income) as its biggest selling point. But there are some other goodies thrown in, too - along with the usual list of caveats. So, take a look at a summary of what the Roth could do for you. Next time, I'll look at how this account stacks up to its traditional IRA cousin.
The Roth Bonuses
With a Roth, you may make some penalty-free withdrawals of any earnings without paying taxes - and before retirement or age 59-1/2 - so long as the account has been open for at least five years. In this case the money must be for a first-time home purchase (up to $10,000 in your lifetime, in this instance) or for qualified education expenses for you or your family.
Another bonus for Roth holder is the distribution rules - if you keep working, you can continue contributing after age 70-1/2. You also won't be required to take a certain minimum distribution after this age.
Some Drawbacks Remain
As lawmakers evolved the Roth from the traditional IRA, however, they left in some familiar drawbacks. These include -
Contribution limits - You are limited to $2,000 per year in Roth contributions, or $4,000 if you're married and filing jointly (marrieds-filing-separately aren't eligible for Roth IRA contributions). This limit is gradually reduced for those with adjusted gross incomes between $150,000 and $160,000, and for singles in the $95,000 to $110,000 range. And, these limits are a combined total for your annual contributions to both Roth and traditional IRAs.
Non-deductible contributions - Roth IRA contributions are never tax-deductible (as they can be with a traditional IRA).
Tax penalties for certain distributions - Yes, that 10% tax penalty remains for distributions before 59-1/2 that don't qualify for favorable tax treatment. And, you'll also owe regular income taxes on these non-qualified distributions.
No retirement plan rollovers allowed - Word has it (though the IRS has been cagey about actually saying it) that you can't roll over your 401(k) plan into a Roth IRA, something you can do with a traditional IRA.
Is That All There Is?
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