Roth IRAs for Financial Retirement
A Roth IRA is preferable to the Traditional IRA for one reason and one reason only. It would much rather face the evil that we can know and pay taxes on that money now than the evil that we don’t know by paying taxes not only on the investment but also the earnings later.
Features of Roth IRAs:
o Contributions are post tax money and no taxes have to be paid under normal distributions.
o Based upon MAGI; single: full contrib. up to $105k, partial contrib. to $120k; Married: full contrib. up to $166k, partial contrib. to $176k; can’t contribute more than you make in that year.
o $5k/yr for age 49 or below; $6k/yr for age 50 or above in 2009; limits are total for trad IRA and Roth IRA contributions combined.
o Individual sets up this plan.
o No matching contributions available for employees.
o Distributions can begin at age 59 1/2 as long as contributions are “seasoned” (been in the account for at least 5 years) or owner becomes disabled.
o This is a huge advantage for Roth IRAs within estate planning.
o At any point, the owner may withdraw the total contributed into the IRA.
o Early withdrawal, that is more than contributions plus seasoned conversions are subject to normal income taxes and 10% penalty if not qualified distributions.
o Up to $10k can be used for primary home down payment. Must not have owned a home in previous 24 months. House must be owned by IRA owner or direct linear ancestors or descendants.
o Roth IRA can withdraw for qualified higher education expenses of owner, children, and grandchildren.
o Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability.
o Funds can be either transferred to another institution or they can be sent to the owner of the Roth IRA who has 60 days to put the money in another institution in a rollover contribution to another Roth IRA.
o When owner dies, spouse as beneficiary can roll both accounts into one Roth IRA account. Other beneficiaries will be subject to forced distributions (tax free) based on life expectancy. Beneficiaries will not pay estate tax if the inheritance is under the exemption amount.
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