If you've looked into retirement planning, you've probably heard about the Roth IRA.
Maybe in the past you decided against one of these arrangements, or perhaps you just
decided to sleep on it. Whatever the case may be, now's a good time to reacquaint
yourself with the Roth IRA and its potential benefits, because you have until April
18, 2016, to make a 2015 Roth IRA contribution.
With a Roth IRA, you give up the deductibility of contributions for the freedom to
make tax-free qualified withdrawals. This differs from a traditional IRA, where
contributions may be deductible and earnings grow on a tax-deferred basis, but
withdrawals (less any prorated nondeductible contributions) are subject to ordinary
income taxes - plus a 10% penalty if you're under age 59½ at the time of the
With a Roth IRA, you can withdraw your contributions tax-free and penalty-free
anytime. Withdrawals of account earnings (considered made only after all your
contributions are withdrawn) are tax-free if you make them after you've had the Roth
IRA for five years and you're age 59½ or older. Earnings withdrawn before this
time are subject to ordinary income taxes, as well as a 10% penalty (with certain
exceptions) if withdrawn before you are age 59½.
On the plus side, you can leave funds in your Roth IRA as long as you want. This
differs from the required minimum distributions starting after age 70½ for
For 2016, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age
50 or older), reduced by any contributions made to traditional IRAs. Your modified
adjusted gross income (MAGI) may also affect your ability to contribute, however.
In 2016, the contribution limit phases out for married couples filing jointly with
MAGIs between $184,000 and $194,000. The 2016 phaseout range for single and
head-of-household filers is $117,000 to $132,000.
Regardless of MAGI, anyone may convert a traditional IRA into a Roth to turn future
tax-deferred potential growth into tax-free potential growth. From an income tax
perspective, whether a conversion makes sense depends on whether you're better off
paying tax now or later.
When you do a Roth conversion, you have to pay taxes on the amount you convert. So if
you expect your tax rate to be higher in retirement than it is now, converting to a
Roth may be advantageous - provided you can afford to pay the tax using funds from
outside an IRA. If you expect your tax rate to be lower in retirement, however, it
may make more sense to leave your savings in a traditional IRA or employer-sponsored
Roth IRAs have become a fundamental part of retirement planning. Even if you're not
ready for one just yet, be sure to keep the idea of opening one on your radar.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2016