1) Tax – Free Distributions
If the Roth IRA account is open for at least 5 years and the taxpayers is over age 59 1/2, then all of the distributions from the Roth IRA are tax-free.
2) Take Your Contributions Back at Any Time
Unlike a Regular (or Traditional) IRA, contributions to a Roth IRA are not income tax deductible. Because the contribution is not tax deductible, taxpayers can take back their contributions at any time without any income tax. Taxpayers under age 50 can contribute $5,000 per year. Taxpayers age 50 and older are allowed an additional ‘catch-up’ contribution of an additional $1,000 or total of $6,000.
3) No Required Minimum Distribution (“RMD”)
With a Regular or Traditional IRA, taxpayers must begin to take out their RMD by April 1 of the year following the year they turn 70 1/2. With a Roth IRA, there is no requirement for a RMD. This is effective for the taxpayer and surviving spouse. Non-spousal beneficiaries like children and grandchildren, will have the RMD requirement. If the account met the above qualifications however, there will be no income tax on this RMD. This is what makes the Roth IRA such a wonderful wealth transfer tool.
4) Pay the Income Taxes Up Front
As was mentioned above, contributions to a Roth IRA are not income tax deductible. The benefit to the Roth IRA is on the backend, when distributions are being made. Why would you want to pay income taxes up front. Income tax rates are near all-time lows. Given the federal deficit it appears that income taxes are headed up.
Who is Eligible to contribute to a Roth IRA?
Taxpayers that are under 70, with earned income and income below a specified threshold can contribute.
In 2012 married couples filing a joint return can contribute when their modified adjusted gross income is under $173,000. A partial contribution is allowed with income up to $183,000, and nothing is allowed over this amount. Single filers can contribute when their modified adjusted gross income is under $110,000. A partial contribution is allowed with income up to $125,000, and nothing is allowed over this amount.
ACTION ITEM: Eligible taxpayers should strongly consider funding their Roth IRA.
If you would like assistance to see with why a Roth IRA makes sense to you, please call us at (860) 646-2465.
Thomas F. Scanlon, CPA, CFP®