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Roth IRAs in 1997 Tax Act

Contributions to Roth IRAs

Distributions from Roth IRAs

Which is better? A deductible IRA or Roth IRA?

Try our Roth IRA Calculator

Contributions to Roth IRAs

Can contribute up to $2,000 per year in after tax earned income

Contributions phased-out for the following AGIs

Single : $95,000 - 110,000

Married, joint : $150,000 - 160,000

Can split $2,000 maximum contribution with traditional deductible IRA

Can have any combination of contributions to deductible IRA and Roth IRA as long as the total does not exceed $2,000 or your earned income

Roth IRA contributions do not give you an immediate tax benefit

Unlike deductible IRAs, Roth IRAs do not reduce your tax liability this year

But qualified distributions are not subject to tax, unlike deductible IRA

Can establish a Roth IRA starting in 1998

Can contribute to a Roth IRA even after age 70.5

Unlike traditional IRA where you must be under age 70.5 to contribute new funds

But you still need earned income to make a contribution

Converting your existing traditional IRA to a Roth IRA

Must have AGI under $100,000 for rollover

Rollover to Roth IRA may be beneficial, but you will pay income taxes (but no penalties) on taxable amounts,

For 1998 only, you can spread out this rolled-over amount over four years to reduce your tax liability

This is probably a gimmick to help balance the budget by the year 2002

Distributions from Roth IRAs

After funds have been in the Roth IRA for 5 years, tax-free distributions are possible in these cases

After the individual reaches age 59.5

Death or disability of the individual

For a first-time purchase of a home ($10,000 lifetime cap)

Tax-free early withdrawals at any time before age 59.5 are possible if the taxpayer is withdrawing contributions, not accumulated earnings

Distributions are deemed to be first from contributions, then from accumulated earnings

Further withdrawals from a Roth IRA before the Roth IRA has been in existence for five years will be subject to income tax and 10 percent penalty tax

Unlike deductible IRAs and other retirement plans, a Roth IRA is not subject to mandatory distribution rules

This works to your advantage

However, minimum distribution rules apply to beneficiaries

Which is better? A deductible IRA or Roth IRA?

Depends on current tax rate, future tax rate, return on investment and time in the investment

For most reasonable cases, a Roth IRA contribution is at least as good as a deductible IRA contribution

Plus a Roth IRA is generally more flexible than a deductible IRA

Try our Roth IRA Calculator

Body text copyright 1997 by David Luhman