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Roth IRAs
Most Americans are eligible to
contribute to a Roth IRA if their adjusted gross incomes are below $110,000 (for singles)
or $160,000 (for married couples). The amount you can contribute begins to phase out once
your income reaches $95,000 (for singles) and $150,000 (for married couples).
Advantages:
Tax-free Investing
Although your contributions are not tax-deductible, your money will grow inside your Roth
IRA tax-free, and when you begin making withdrawals, your distributions will be tax-free
as well, provided you meet the necessary criteria.
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Early Withdrawals
If your account has been opened for at least five years, early withdrawal penalties are
waived if you withdraw earnings before you reach age 59 1/2 if used to buy a first home,
pay for educational or medical expenses, become disabled or die. Contributions may
be withdrawn at any time, however you may be responsible for ordinary income taxes on earnings.
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Choice of Investment Options
You can put your IRA money in a variety of investments including stocks, bonds, mutual
funds, CDs, etc... You do not have to declare capital gains or dividends as
income on your tax filings as long as all Roth IRA investments remain within the account.
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No Mandatory Distributions
Unlike traditional IRAs, you may wait as long as you'd like to begin making withdrawals.
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Disadvantages:
Early Withdrawal Penalties
In most cases you'll have to pay ordinary income taxes plus a 10% penalty if you withdraw
any of your Roth IRA earnings before you turn 59 1/2 years old or if you withdraw earnings
before a 5-year holding period.
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Contribution Limits
The tax code limits your annual contributions to $4,000 (for singles) and
$8,000 (for
married couples). You may continue contributing to your IRA after age 70
½.
The Tax Relief Act signed in June 2001 gradually increases this contribution
maximum to $5,000 per individual over the next few years and also allows a
"catch-up" provision for investors over 50 years of age.
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