Table of Contents

What's good about investing in IRAs?

There are Roth IRAs and Traditional IRAs, both of which are discussed in the Financial Guide listed below. All IRAs defer taxation of investment income until funds are withdrawn. Contributions to Traditional IRAs in many cases are deductible; withdrawals from Traditional IRAs are taxable income, except for withdrawal of previously non-deductible contributions.

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Can anyone have a traditional IRA?

If you have income from wages or self-employment income, you can contribute up to $4,000 in 2005-7, higher in later years. Thus, they are available even to children who meet these conditions.

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Can my homemaker spouse have an IRA?

Yes. Contributions of $4,000 for each spouse are allowed if the coupleís wages or self-employment earnings are $8,000 or more. This rises to higher amounts after 2007.

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What makes Roth IRAs so special?

Roth IRAs offer the following advantages:

  • Withdrawalsóif they qualifyóare completely exempt from income tax, unlike all other retirement plans.

  • Many can quickly build up their Roth IRA accounts by converting traditional IRAs into Roth IRAsóat a tax cost.

  • Since you need not withdraw from your Roth IRA at any age, more can be passed on to heirs than would be allowed under other plans.

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Can anyone have a Roth IRA?

Not everyone can have a Roth IRA. The following conditions apply:

  • You canít contribute to a Roth IRA for a year with income above $110,000 if single or $160,000 on a joint return.

  • You canít convert a traditional to a Roth IRA with income above $100,000 (single or joint return).

  • You must have earnings from personal servicesó$4,000 or more to make the (maximum) contribution - though an additional contribution of $1,000 is allowed persons age 50 and over. The $4,000 amount for earnings and contributions rises higher after 2007.

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Can I set up a Roth IRA for my spouse?

Yes, subject to the income conditions above. This allows contributions of $4,000 each if the coupleís earnings are at least $8,000 after 2004; higher amounts after 2007.

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Can I set up a Roth IRA for my child?

Yes, for a child with personal service earnings, and subject to the other income conditions.

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What's the downside to Roth IRAs?

The following is a brief list of negative issues regarding Roth IRAs:

  • Thereís never a deduction for Roth IRA contributions.

  • To build a sizable Roth IRA fund, you must convert a traditional IRA (or, after 2007, funds form an employer plan). Conversions are taxable.

  • In converting to a Roth IRA, you risk an excess contribution penalty and an early withdrawal penalty, if income exceeds $100,000.

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What can I do if I converted to a Roth IRA and my income exceeds $100,000?

You can "re-characterize" your Roth IRA to a Traditional IRA (with suitable paperwork). This eliminates the Roth IRA and the tax. The deadline is the tax return due date including extensions.

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What if my Roth IRA assets fall in value after conversion?

You can re-characterize as in the preceding answer, so you donít pay tax on asset values you no longer have.

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How are my heirs taxed on inherited Roth IRA wealth?

Your heirs are taxed as follows:

  • No income tax whatever, if the funds have been in the Roth IRA at least 5 years.

  • The heir can spread the withdrawal over his or her life, continuing the tax shelter for amounts not withdrawn.

  • Estate tax treatment is the same as for traditional IRAs.

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