Understanding the Roth IRA

The Roth IRA came into existence back in 1998 and it differs from the traditional IRA in a number of important ways. The key difference lies in how the account is taxed. While the contributions to a traditional IRA may be deductible from current income, contributions to a Roth IRA are not.

There is also an important difference when the proceeds of the two accounts are tapped in retirement. While the funds withdrawn from a traditional IRA are taxable as ordinary income in retirement, the funds in a Roth IRA are free of federal taxes for life. This can be an important distinction, particularly for those workers who expect their tax bracket to rise in retirement.

Those considering either type of IRA account should consult with either a tax planner or a certified public account to determine their eligibility and to choose with type of account is the right choice.

Workers are eligible to open a Roth IRA even if they are enrolled in or covered by a pension plan or 401(k) plan at their employer. For the year 2018 the contribution limit was $4,000, but that limit rises to $5,000 beginning in 2019. Those who are 50 and older are able to contribute another $500 in 2018 and another $1,000 in 2019, making their contribution limit $4,500 and $6,000 for the years 2018 and 2019 respectively.

The eligibility requirements for a Roth IRA are simple. First, the worker or their spouse must have either compensation income or alimony which is at least equal to the amount of money contributed to the IRA. Secondly, the adjusted gross income may not exceed $95,000 for an individual or $150,000 for a married couple filing together. When an individual’s adjusted gross income exceeds $110,000 for a single person or $160,000 for a married couple filing jointly, the eligibility for a Roth IRA is slowly phased out an eventually eliminated.

A Roth IRA is not the right choice for everyone, but for many people it is an excellent choice. While the traditional IRA still has an important role to play in retirement planning, the Roth IRA is an excellent compliment to this important retirement planning tool.

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