In 1997, Congress made a good thing better when it created a new type of retirement savings account, the Roth IRA. Named after Senator William Roth, who introduced the legislation that created them, Roth IRAs differ from traditional IRAs in three key respects:
- Roth IRAs are funded with after-tax income, so there is no current deduction for annual contributions. However, earnings are tax-free upon withdrawal. In contrast, traditional IRAs are funded with pre-tax income, so taxes on earnings generally must be paid upon withdrawal at ordinary income tax rates.
- There are no required minimum distributions (RMDs) with Roth IRAs. This means you don’t have to start taking money out at age 70½ (like you do with a traditional IRA) if you don’t need it, and can even bequeath the money to your heirs if you choose.
- Roth IRA contributions (but not earnings) can be withdrawn tax-free and without penalty at any age. In contrast, withdrawals from a traditional IRA before age 59½ are usually subject to a 10% early distribution penalty and taxation at ordinary income tax rates.
This third provision can make Roth IRAs an extremely flexible savings and investment tool. For example, many people use Roth IRAs as both college and retirement savings tools—in effect, killing two investment “birds” with one stone!
Annual Contribution Limits
The annual contribution limit for Roth IRAs is the same as it is for traditional IRAs: $5,000 a year (or $416 a month), or $6,000 a year (or $500 a month) if you’re age 50 or over.
Both you and your spouse can each establish separate Roth IRAs and contribute up to this amount. Important note: These annual contribution limits apply to Roth and traditional IRAs combined. In other words, if you’re 50 years old, you could contribute $3,000 to a Roth IRA and $3,000 to a traditional IRA in one year, but not $6,000 to each.
Unfortunately, not everyone is permitted to open and contribute to a Roth IRA. Eligibility phases out above certain modified adjusted gross income (MAGI) limits:
- If your MAGI is between $110,000-$125,000 (if you’re single) or $173,000-$183,000 (if you’re a married couple filing jointly) in 2012, you can make a partial Roth IRA contribution.
- If your MAGI is $125,000 (if you’re single) or $183,000 (if you’re a married couple filing jointly) or more in 2012, you can’t open or contribute to a Roth IRA.
It’s Not Too Late for 2011
Note that Roth IRA contributions can be made up until your tax-filing deadline (not including extensions). Therefore, you likely have until this April 17 to make a contribution for tax year 2011, assuming you meet the criteria noted above.
“Sometimes, it can be difficult to decide which IRA makes the most sense for you. Your investment counselor can help you weigh the pros and cons of traditional and Roth IRAs and make the best decision based on your individual circumstances and goals,” says David Lerner, president of David Lerner Associates.
About David Lerner Associates
At David Lerner Associates we believe in the sensible middle ground of investing. We do not run with the herd. We pursue these fundamental investment principles regardless of market conditions. While offering a full range of investments, we feature those that we believe are based on real value and regularly pay dividends or interest.
Founded in 1976, David Lerner Associates is a privately-held investment company. David Lerner Associates headquarters are in Syosset, New York and has branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY.
For more informationcontact David Lerner Associates 1 877 367 5960