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Roth IRA - Retirement Planning
Roth Individual Retirement Account
Major Advantages of a Roth IRA
- Roth IRA withdrawals are tax-free as long as holding period requirements are met
- Contributions can be withdrawn at any time without tax or penalty
- Required Minimum Distributions at age 72 do not apply to Roth IRAs
Major Disadvantages of a Roth IRA
- The Roth IRA legislation is unprecedented, thereby requiring careful review before utilizing a Roth IRA
- Each person’s unique situation must be evaluated before opting to implement a Roth IRA
Making Current Contributions
- $6,000 maximum in 2020 & 2021
- Workers over 50 years old may contribute an additional $1000
- No tax deduction for contribution
- Married - For 2021, Modified Adjusted Gross Income (MAGI) must be less than $208,000, and allowable contributions are reduced for MAGIs over $198,000
- Single - For 2021, MAGI must be less than $140,000, and allowable contributions are reduced for MAGIs over $125,000
Holding Period Required Before Withdrawal of Investment Earnings
- Account must be held for 5 years
- Like traditional IRAs, owner must be age 59½
Converting a Traditional IRA to a Roth IRA
- Must pay ordinary income taxes on the amount converted (less basis, if any, from Form 8606)
Roth IRA Conversion Risks
Congress could change the tax laws by imposing a threshold above which Roth IRA distributions could not be withdrawn tax-free, or imposing a modest tax on all Roth IRA distributions. For example, Social Security was originally not taxed at all. Now, depending on Adjusted Gross Income, a percentage of Social Security may be taxed at ordinary rates.
Roth IRA Distribution
- There is no required minimum distribution at age 72
- Beneficiaries can be changed after age 72, but beneficiaries now must withdraw the full account value by December 31st of the 10th anniversary year of the IRA owner's death.
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