Roth IRA
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Roth
IRAs are not appropriate for everyone, but this type of IRA does
have unique features which makes it very attractive to certain
investors, including its ability to deduct tax-free.
This feature makes Roth IRAs appealing to investors who
believe they will be in a high tax bracket when they retire.
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The
ability to deduct tax-free is the major difference between
Traditional IRAs and Roth IRAs.
Your contributions grow in a tax-free account that allows you
to take out distributions that are free of income taxes, as long as
you abide by the rules.
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Usually,
you would not withdrawal from your tax-free account until the age of
59 ˝ because in most cases, the IRA imposes a 10 percent penalty on
withdrawal of earnings before this age if the account has been
opened for less than five years.
You can withdraw early if the money is used to buy your first
home or cover college costs, if you have had the account for at
least five years. You
never have to take out any distributions.
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Unlike
Traditional IRAs, contributions to Roth IRAs are not deductible from
your current income tax. Under
certain circumstances, you can convert a Roth IRA to a Traditional
IRA. Contributions may
be made up until the date your income taxes are due that year.
However, the earlier you fund an IRA, the sooner it can start
working for you.
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You may
want to consider transferring some conventional IRA monies into a
Roth IRA. You’ll have
to pay taxes on previously deductible contributions and investment
earnings, but I may be worth it.
You’ll have to consider your ability to pay the taxes now
and your expected tax rate in retirement in making the
decision.
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Another
advantage is you’re not required to start taking money out at 70
˝ unless you’re retired. Those
who continue to work beyond that age can leave their full balance in
the 401(k) until the year following retirement.
One more twist is the ability of those older than 70 ˝ to
continue funding their accounts.
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Contribution
Limitations:
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The contribution limits are the same as with Traditional IRAs, up
to $5,000 per year through 2009 |
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Taxpayers age 50 or older have a special catch-up period that
allows them to contribute an additional $1,000 per year, making the
contribution limit $6,000 for 2009
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Contribution
Limitations (Income): |
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Married individuals filing jointly may contribute $5,000 ($6,000 if
50 or older) to a Roth IRA only if their modified adjusted gross
income (MAGI) is less than $166,000.
If their MAGI is between $166,000 and $176,000, they can
contribute a lesser amount than the full limit.
Also, if the MAGI exceeds $176,000, they are not eligible to
contribute to a Roth IRA for 2009 |
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Single individuals may contribute $5,000 ($6,000 if 50 or older) to
a Roth IRA only if their MAGI is less than $105,000.
If their MAGI is between $105,000 and $120,000, they can
contribute a lesser amount than the full limit.
Also, if the MAGI exceeds $120,000, they are not eligible to
contribute to a Roth IRA for 2009 |
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