The Roth IRA Advantage Traditional IRAs are familiar to most taxpayers, providing a relatively simple method of saving for retirement AND deferring taxes in the process. But one drawback of the Traditional IRA is that once withdrawals from them begin, distributed earnings and contributions that were tax-deductible get taxed. In contrast, a Roth IRA allows no tax deduction of contributions. However, it does allow tax-free accumulation of the account’s earnings so that at retirement ALL distributions from a Roth IRA are tax-free, both contributions and earnings. Naturally, to get this tax-free treatment, certain conditions must be met. Predicting IRA GrowthThe question always arises as to the future value of an IRA and the retirement income that it will produce. The future value for Rollover IRAs is dependent on whether the IRA will contain only rollover funds or whether additional annual contributions will be made to the IRA. Two tables follow, one including the future value of a rolled over sum and the second illustrating the future value of a $1,000 annual contribution. By using the two tables and an assumed investment rate of return, it’s possible to predict the future value of an IRA account, whether it be traditional or Roth. Lump Sum Accumulation$1 Rolled Over “X” Years Example: A rollover contribution of $30,000 left to accumulate for 25 years at 6% will be worth $128,757 ($30,000 x 4.2919) at the end of the period. IRA Growth With $1000 ContributionFor larger contributions, extrapolate the results. Example: contribute $3,000 annually, simply triple the table results. Example: $2,000 annually contributed to an IRA earning 6% per annum would have a value of $109,730 (54,865 x 2) after 25 years. Based on the two examples above, a taxpayer who rolled $30,000 into an IRA and then continued to contribute $2,000 a year to that IRA would have $238,487 in the IRA account at the end of 25 years. How Much Can You Contribute?As with a Traditional IRA, to be eligible for a contribution to a Roth IRA, you (or your spouse, if you aren’t employed or self-employed) must have taxable compensation like wages, earnings from a self-employed business, or taxable alimony. The IRA contribution annual limit slowly rose over the years as a result of specified increases in the law, but has leveled off recently because of low inflation rates. In addition to normal contributions, taxpayers age 50 and older are allowed to make “catch-up” contributions, allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable by age. The annual limit applies to all of your IRA contributions in a given year. So, you can contribute to a Traditional IRA and a Roth IRA as long as the combined total does not exceed the annual IRA limits and you meet all of the other requirements. Your income level can limit your Roth contributions. Contributions are gradually reduced (i.e., phased out) for married joint taxpayers with adjusted gross income (AGI) between $193,000 and $203,000, and for other taxpayers when the AGI is between $122,000 and $137,000. The contributions of married separate (MS) taxpayers who lived together at anytime during the year are reduced when the AGI is between $0 and $10,000. The phase out applies regardless of whether you (or spouse, if married) are an active participant in another plan. The amounts indicated are for 2019. Call this office for the rates for other years. Note: The income limitations for making Roth contributions can be circumvented by first making a traditional IRA contribution and then subsequently converting it to a Roth IRA. Please call this office for additional information. With Traditional IRAs, contributions cannot be made once you turn age 701/2. However, there is no such age limit for making contributions to Roth accounts. Handling Roth IRA DistributionsGenerally, distributions from a Roth IRA (unless due to a conversion from a Traditional IRA) are treated as coming first from contributions (principal) on which you have already paid the tax. Therefore, any distribution to the extent of the principal is tax-free. Distributions of earnings are also tax-free (qualified distributions) if: They are not made within the five-year tax period beginning with the first tax year in which you contributed to the Roth account, AND They meet one of the following conditions: They are made after your each age 591/2; OR They are made after your death; OR They are made on account of you becoming disabled; OR They are made so that you can pay up to $10,000 in expenses as a first-time homebuyer. Another big advantage of Roth IRAs over Traditional IRAs is that the former are not subject to the minimum required distribution rules at age 701/2. This means that if you don’t need to utilize your Roth IRA for retirement, you can leave it untapped for heirs (who would also get deferral on withdrawals, but would be subject to certain required distribution rules that apply to beneficiaries). Conversions of Traditional IRAs To Roth AccountsBecause of the tax-free nature of Roth accounts, Congress has provided taxable rollover provisions that allow you to convert your Traditional IRAs to Roth accounts. Once you convert, all future earnings in the new Roth account accumulate tax-free. The catch is that the tax on the Traditional IRA must be paid in the year the conversion is made to the Roth. Whether it is beneficial to elect this taxable rollover depends on a number of variables.