The Roth IRA offers four main advantages over the Traditional IRA, 401(k) or 403(b).
- The opportunity to increase your investment earnings tax-free.
- A Roth IRA is effectively larger than a Traditional IRA because all the money is working for you, not the IRS.
- There are generally no Required Minimum Distributions, so the tax benefits can be preserved longer.
- You have the ability to withdraw contributions anytime prior to age 591⁄2 penalty free.
The eligibility to make Roth IRA contributions is subject to the following filing status and MAGI limits.
- Up to $120,000 = full amount
- More than $120,000 but less than $135,000 = pro rata
- $133,000 or more = not eligible
- Up to $189,000 = full amount
- More than $189,000 but less than $199,000 = pro rata
- $199,000 or more = not eligible
There are no MAGI limits on a Roth Conversion.
Taxation on Roth Conversions:
- Conversions are taxable in the year of conversion.
Converting Inherited Assets:
- Inherited Individual IRAs cannot be converted unless the beneficiary is a spouse.
- Inherited employer plans can be converted if rolled directly from the plan to an inherited Roth IRA.
Distribution Order - Five Year Rules
- Contributions to a Roth come out first and are always tax and penalty free
- Conversions come out second and must be held five years OR to 591⁄2 to avoid
the 10% penalty. (NOTE: pretax first, after tax second. After tax not subject to rule.)
- Must be held five years AND to age 591⁄2 to be tax free
- Must be held to 591⁄2 to be penalty free
- Five year clock starts with the first contribution to Roth IRA
Contact your Wealth Advisor for more details.
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