The Roth IRA is a non-deductible IRA. The trade-off of the loss of the tax deduction is some very big tax benefits when compared to other qualified retirement plans. These two benefits are the following:
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1) All of the distributions should be tax-free as long as you are at least 59½ years old or disabled when you receive them. |
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2) Unlike the traditional IRA, pension and profit sharing plans, you are not required to take any distributions after reaching age 70 ½. Assuming that you do not need the funds, you will probably be able to pass more of your assets to your children. |
These two tax benefits are available to all Roth IRAs, as long as the account holder has at least one ROTH IRA that is at least 6 years old.
Similar to other IRAs, the annual contribution limit for 2008 and 2009 are $5,000. Individuals over 50 years old at year-end are entitled to an additional $1,000 contribution. Non-working spouses are entitled to IRA contributions based upon their spouse's earned income as long as a joint tax return is filed.
Your eligibility to make a current year's contribution to a Roth IRA phases out starting with income levels depending upon your filing status. The 2008 and 2009 income levels are the following ranges:
|
Filing status |
Year 2008 ranges |
Year 2009 ranges |
| Single or head of household |
$101,000 to 116,000 |
$105,000 to 120,000 |
| Joint tax return |
$159,000 to 169,000 |
$166,000 to 176, 000 |
| Married filing separate return |
$0 to 10,000 |
$0 to 10,000 |
If you meet certain requirements, you can transfer all or part of your present holdings in a traditional IRA into a Roth IRA. The transfer will trigger the same income as a taxable distribution. However, the transfer will be exempt from the 10% early distribution penalty and any Illinois income tax. You must meet three requirements for the year to transfer assets from a regular IRA to a Roth IRA.
1st - The IRA must be one that would qualify for rollover treatment. The rules are complicated. However, the limitations usually apply to IRAs that are inherited from a deceased person and IRAs that received assets from a pension or profit sharing plan.
2nd - Your tax return filing status is other than married filing separately.
3rd - Your income for the year does not exceed $100,000. If you are married, you count your joint income. For purposes of the $100,000 income test, income caused by the transfer to the Roth IRA is excluded.
Conversions of traditional IRAs into ROTH IRAs can be costly unless done correctly. Proffessional advise is recommended . If you have any questions concerning this topic, you need to talk to your tax professional or you can contact us at (708) 647-1045 Clients can also contact us via my secure email by pressing here.