Roth IRA

Last updated: April 8, 2016

 

Similarities to an IRA

Another way to save on your own for retirement is a Roth IRA. For 2015, the contribution limits are the same as for traditional IRAs—$5,500 for most workers and their spouses and $6,500 for those who are 50 or older by the end of the year. The contribution deadline (the April 15 tax-filing deadline) is also the same.

Critical Differences of a Roth IRA

1. There’s no age 70 1⁄2 cutoff for Roth contributions.

  • As long as you have earnings from a job, you can shovel cash into your Roth.

2. Unlike a traditional IRA, there is no upfront tax deduction for a Roth IRA, either.

  • Instead, you make your contributions with after-tax money.

3. While a Roth IRA grows tax-deferred, just like a traditional IRA, the big advantage comes at the end: Withdrawals are tax-free in retirement.

  • That could be crucial if you think your tax rate may be higher in retirement.

4. Roth IRAs offer another advantage to retirees: There are no mandatory distribution rules.

  • That means you don’t have to tap your Roth IRA unless you want to.

5. Another major departure from the traditional IRA is particularly important to your heirs.

  • While funds withdrawn from an inherited traditional IRA are taxed, funds in a Roth go to heirs tax-free.

6. Roth IRAs are more flexible than traditional IRAs, too.

  • Because the contributions are funded with after-tax dollars, you can withdraw your contributions (but not earnings) anytime tax-free and penalty-free. Once your turn 591⁄2, you can even dip into earnings tax-free if the account has been open for at least five years.

Eligibility for a Roth IRA

Not everyone is eligible to contribute to a Roth IRA. To contribute the full $5,500 ($6,500 if you are 50 or older) in 2015, your income can’t exceed $116,000 if you’re single or $183,000 if you’re married filing jointly. You can make a partial contribution if you’re single and your income is between $116,000 and $131,000 ($183,000 and $193,000 if married filing jointly).

Thanks to a change in the rules that went into effect in 2010, anyone, regardless of income, can convert a traditional IRA to a Roth IRA. You must pay tax on the amount converted, but the switch means future earnings will be tax-free rather than simply tax-deferred.

*The information on this page is credited to IPT and Kiplinger. Their original materials are made available by the Kansas Securities here.

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