Posted on | February 1, 2011 | 1 Comment
To be eligible to have a Roth IRA an individual must be below a certain tax bracket. More appropriately the ability to contribute to a Roth IRA phases out at certain income levels. Also the ability to withdraw funds from a Roth IRA tax free is dependent on two factors. First the fund must be at least five years old for principal withdrawals, and the owner must be at least 59.5 for withdrawals on the growth above principal.
There are many retirement plans so choosing the right one can be tedious. Some of the advantages of a Roth IRA include the ease of converting to a Roth IRA from a traditional IRA. After the conversion the funds from the traditional IRA can be withdrawn from the Roth IRA without penalty, as long as the five year seasoning period has passed on the converted funds.
Another advantage that a Roth IRA provides is a maximum of $10,000 in earnings can be withdrawn tax and penalty free, if used to purchase a residence for a first time buyer. The home must be purchased by the owner of the Roth IRA, their spouse, or descendant. The qualified relative or owner whom the distribution is paid to must not have owned a home in the past 24 months.
In addition to advantages, Roth IRAs also hold disadvantages. Contributions to a Roth IRA do not lower a persons adjusted gross income (AGI), in contrast the money paid into a traditional IRA will lower a persons AGI . The benefits from lowering one’s AGI are, reducing taxable income and making certain deductions and tax credits available.
Lastly a person who pays state income taxes and pays money into a Roth IRA will have to pay taxes on the money deposited into the Roth IRA account. This is to be expected since the money is taxed going in and not coming out, but if the owner retires to a state that has a lower income tax rate then they have missed out on a tax deduction basically.
If the owner of the Roth IRA had instead used a traditional IRA the amount of money coming out would be taxed according to the income tax rate of the state they are now residing in. So taking into consideration the state a person will be retiring to can make a difference in choosing which IRA is best.
- Learn Your Roth IRA Withdrawal Rules and Penalties (2008taxes.org)
- What is a Roth IRA and how can it Benefit You? (2009tax.org)