Roth IRA

A Roth IRA is also primarily an individual savings plan. Contributions can be made up to a specified limit but are non-deductible on your tax form. Withdrawals are tax free within certain limitations. Withdrawals can be made without penalty once you reach the age of 59 ½ provided the funds have been in the account for 5 years. You can continue contributing to a Roth IRA even after you reach the age of 70 ½.

A Roth IRA must be set up with an IRS approved institution such as banks, some credit unions, brokerages, and so on. When you set up a Roth IRA, you will receive the IRA statement disclosure statement and the IRA adoption agreement and plan document. A Roth IRA can be established at anytime during the year but contributions for a tax year must be made before the owner’s tax filing deadline.

What are the Advantages of a Roth IRA?

• Contributions can be made after age 70 ½ (unlike the age limitation of a traditional IRA)
• Eligible individuals may contribute up to a specified limit annually
• Contribution eligibility is not restricted by active participation in an employer’s retirement plan
• Withdrawals after age 59 ½ are usually tax-free provided a 5 year wait has occurred
• No minimum withdrawal rules when you reach age 70 ½
• Heirs are not subject to taxes on earnings

What are the Disadvantages of a Roth IRA?

• Premature withdrawals in excess of contributions are fully taxable and are also subject to a 10% penalty
• Contributions are limited each year for each individual
• Tax rules could change
• Money must be left in the account for at least 5 years
• If you die, your heirs will have to follow the same minimum withdrawal rules as for a traditional IRA
  

Distribution Rules
If you have more than one Roth IRA, they are treated as a single account when calculating the tax consequences of distributions from any of them. To be tax-free, a distribution must meet both of the following requirements:

• the distribution must be made after the 5 year holding period
• the distribution must be made on or after the individual reaches age 59 ½, made to the individuals beneficiary or estate, made to the individual who has become disabled, or made for a first time home purchase

Traditional and Roth IRA Contribution Limits
Maximum contributions limits are the lesser of the annual dollar limit of the table below or 100% of earned income less contributions to IRAs.

The annual dollar limit is:
2006..... $4000
2007..... $4000
2008..... $5000

For those who are age 50 and over before the close of the taxable year, the following annual limit applies:
2006..... $5000
2007..... $5000
2008..... $6000

After 2008, the contribution is to be adjusted for cost-of-living increases.