The new tax laws overhaul the rules for IRAs. Individuals now have more flexibility and choices with regard to IRAs.
For the tax years 2005 through 2007, you may contribute up to $4,000 a year to a Roth IRA. In 2008, the maximum contribution limit will be raised to $5,000 and will be indexed for inflation in $500 increments in 2009 and 2010.
"Catch-up" contributions will enable those age 50 and older to make additional annual deductible contributions of $500 in 2005 and $1,000 starting in 2006.
Therefore, taxpayers age 50 and older can make deductible contributions of $4,500 in 2005, $5,000 in 2006 - 2007, $6,000 plus any inflation adjustment in 2008-2010.
The contributions are NOT tax deductible but they grow tax-free and can be made even after the individual turns 70 ½.
There is no tax on amounts kept in the IRA for at least five years and withdrawn after you reach age 59 ½.
The availability of the Roth IRA phases out for couples with an Adjusted Gross Income of $160,000 or above ($110,000 for singles).
Distributions from both Roth and traditional IRAs prior to age 59 ½ will not be subject to the 10% tax on early withdrawals if the money is used to pay for (1) higher education or (2) up to $10,000 of the cost of a first home.
An individual may contribute cash to a Roth IRA for a non-working spouse for a taxable year up to the maximum deductible limit (disregarding any active participant restrictions) permitted with respect to traditional IRAs for such non-working spouses, reduced by any such contributions made to traditional IRAs for the taxable year on behalf of the non-working spouse.
The maximum contribution permitted to an individual Roth IRA or a spousal Roth IRA is reduced or eliminated for certain high-income taxpayers. The amount of the reduction is the amount that bears the same ratio to the overall limit as the taxpayer's adjusted gross income (AGI) in excess of an applicable dollar amount bears to $15,000 ($10,000 in the case of a joint return).
The amount of the reduction is calculated as follows:
Maximum contributionXAGI - "applicable dollar amount"
$15,000 ($10,000 if a joint return)
The "applicable dollar amount" is (1) $95,000 in the case of an individual filing a single return, (2) $150,000 in the case of a married couple filing a joint return, and (3) $0 in the case of a married person filing separately. Thus, the Roth IRA contribution limit is $0 for (1) individuals filing a single return with AGI of $110,000 and above, (2) married couples filing joint return with AGI of $160,000 and above, and (3) a married individual filing separately with AGI of $10,000 and above.
The amount of the reduction is rounded to the next lowest multiple of $10. Unless the individual's contribution limit is reduced to zero, the Code permits a minimum contribution of $200.
THE BEST CHOICE
Those who favor Roth accounts tend to believe that their income and tax rate upon retirement will not be significantly lower than at present and are willing to prepay tax on income they invest to gain the tax free status on withdrawals and earnings in later years. Additionally, they recognize the advantage of allowing the investment to grow without any required distribution.
Conversely, those who usually favor traditional IRA accounts believe that they can contribute more because of the immediate deferment of the income tax and believe that their income and tax rate may be lower upon retirement or age 70 ½ when they will be required to take distributions.
Perhaps the most important consideration of the Roth IRA is the value of growth without taxation – and the earlier the contributions are made the greater may be the subsequent withdrawals.
Sources: Tax Facts 2006, National Underwriter Company
Financial Planning Consultants, Inc.
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