Roth IRA

Definition of a Roth IRA

The Roth IRA is similar to the traditional IRA in terms of contribution limits per year but most of the other rules pertaining to the both are different.  The Roth IRA allows qualified individuals to make after-tax contributions, yearly, into an investment account which will grow at a tax free rate.  At retirement, individuals will be able to withdraw their qualified contributions (basis into IRA and conversion amounts, if any) at a tax-free rate.  Non-qualified contributions, or gains made in the account, will be taxed in the owners current tax bracket.

ROTH IRA CONTRIBUTION LIMITS

For 2008, the maximum allowable contribution for qualified individuals is $5,000.  You may contribute $6,000 if you are above the age of 50. 

If you are single and your adjusted gross income (AGI) is below $95,000, you are eligible to make a full contribution of $5,000 or $6,000.  However, between the $95,000 and $110,000 phase-out range, your contribution limit will be partial based on where you fall within that range.  When your income is above the phase out range, you will no longer be eligible for a Roth IRA. 

For those of you who are married and filing jointly; your combined AGI must be below $150,000 for both of you to make full contributions to a Roth IRA.  The phase out range for joint filers is between $150,000 and $160,000 while filers above $160,000 will not be eligible for a Roth IRA.

Should I convert my Traditional IRA to a Roth IRA?

The Roth vs traditional IRA question is an important one for you to ask yourself; based on your current situation (age, tax bracket, income levels, etc), does it make sense to convert?  For most of you, the answer to this question is Yes.  However, many of you will not be able to make the conversion from a Traditional IRA to a Roth.  For both single and joint filers, the AGI limit is $100,000 for you to qualify to make the conversion.  Yes, it is odd that both single and joint filers have the same AGI limits. 

You should really sit down with a financial advisor and run the numbers to understand if it is worth your time.  For the younger crowd, this may make more sense as it allows you more time to grow your money at a tax free rate. 

Do I have to pay any taxes to Convert?

Yes, you will owe taxes on any earnings and pretax contributions you made to the account.  Additionally, the conversion amount will qualify as income and could push your AGI past thresholds that would disqualify you from receiving other loans.  It is paramount that you sit down with a financial advisor before making this kind of move.

Finally, you may want to think twice about a conversion if you expect a dramatic drop in your tax bracket at retirement.  Again, a financial advisor can aid you here as there are many factors that will go into deciding if this is right for you, such as age, current tax bracket, expected future tax bracket, etc.