Your Tax & Business Advisor
Should I Contribute to a Roth IRA?

By Raymond S. Kulzick, CPA, DBA
As published in the Pinecrest Tribune. November 23, 1998. 

 

Should I contribute to a Roth IRA?

One of the most significant tax changes for 1998 is the new Roth IRA. This option is available to employed individuals in addition to the traditional IRA. In general, a maximum of $2,000 per year ($4,000 for married couples) in total contributions to both the traditional and the Roth IRA is allowed. You may split this and put part in each. You may not contribute to either unless you had employment income (or your spouse did) at least equal to your contribution.

This column will explain how the new Roth IRA differs from the traditional IRA and how to select between them. An option is also available to convert an existing traditional IRA (or part of it) to a Roth IRA. Deciding on conversion is a complex issue and will be discussed in a later column.

Contributions to a Roth IRA are not deductible, whereas traditional IRA contributions may be. Qualified withdrawals from a Roth IRA, however, are not subject to income tax like the traditional IRA. So, essentially, you are foregoing a possible deduction today in order to obtain income later without having to pay income taxes on it. This, of course, assumes that Congress does not change the rules at some later date and make Roth withdrawals partially or wholly taxable.

There is no age limit for making contributions to a Roth IRA and there is no requirement mandating withdrawals after a certain age. This feature, combined with the lack of income tax on withdrawals makes the Roth IRA an attractive estate planning tool in some circumstances. Traditional IRAs are generally subject to income tax in addition to a possible estate tax when left to anyone other than a spouse.

Roth IRA funds may be withdrawn without penalty and without tax (qualified withdrawals) after the account has been open for five years and you have reached 59-1/2. Other circumstances when withdrawals from a Roth IRA are tax-free are death, disability, and first-time home purchase - all in limited circumstances. You can always withdraw your original contributions (but not earnings) without penalty or tax. There are also some additional exceptions when earnings may be withdrawn without the 10% penalty, but subject to regular income tax. Withdrawals that are not qualified are subject to regular income tax and a 10% penalty tax on the accumulated earnings.

In order to be eligible to make Roth contributions you must have income less than a specified amount. There is also a phase out range during which the maximum contribution is reduced. For single individuals, $95,000 is the maximum income for the full contribution ($2,000), with a phase out between $95,000 and $110,000. No contribution is allowed for incomes over $110,000. For married couples filing jointly, $150,000 is the maximum income for the full contribution ($4,000), with a phase out between $150,000 and $160,000. No contribution is allowed for incomes over $160,000. Married couples filing separately cannot make the full contribution and phase out between $0 and $10,000. Significant penalties apply for excess contributions.

In general, if your earnings allow you to contribute to a Roth IRA and you cannot deduct contributions to a traditional IRA, the Roth is preferred. If you can deduct contributions to a traditional IRA, then the choice is more complex and should include an estimate of your tax bracket now versus in retirement, as well as the differences in various other features between the two types of IRAs that were indicated above.

Finally, there is no requirement that you select either a Roth or traditional IRA. You are allowed to split your contribution in any given year and select the other type in a future year. Funds in a traditional IRA may (under certain circumstances and generally with the payment of income tax) be moved to a Roth IRA, however funds in a Roth may not be moved to a traditional IRA. You have until April 15 the following year (1999 for 1998 contributions) to open your Roth IRA account and make your contribution. This is the same deadline that applies to traditional IRAs, but, if you are considering a conversion Roth, the deadline is December 31.

The Roth IRA is a very attractive alternative to the traditional IRA for many Americans, however it still has many restrictions and is not appropriate for everyone.

Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or rkulzick@kulzick.com. More information is also available on the firm's Web site at http://www.kulzick.com/businesspro.

This article provides information of a general nature only and should not be acted upon without seeking appropriate professional advice concerning your specific situation.

Copyright 1998 Raymond S. Kulzick. All rights reserved. 981123.

See Also:

    Should I Convert My Traditional IRA To a Roth IRA?

This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.

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