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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  • Contributions can be withdrawn at any time without tax or penalty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Congress could change the tax laws by imposing a threshold above which Roth IRA distributions could not be withdrawn tax-free, or imposing a modest tax on all Roth IRA distributions.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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