A Roth IRA is a retirement account that allows an investor to make after-tax contributions that receive favorable tax treatment over the life of the account. The contributions and gains in the account grow without taxation and can be withdrawn tax free to provide retirement income. Not all taxpayers can qualify to make the maximum annual Roth IRA contributions because they are covered under an employer sponsored retirement plan or their household income levels are too high. For those who qualify, the Roth IRA can create a tax free retirement income retirement vehicle.
How Does a Roth IRA Work?
Taxpayers with earned income, who qualify for a Roth IRA can contribute up to $5,500 per year into the account for 2014 tax year. For individuals older than 50, they may contribute an additional $1,000 (catch-up provision) for a maximum annual contribution amount of $6,500. The contribution is made with after-tax dollars and gains accumulate without taxation for the life of the account. When a withdrawal is made, no income tax is paid on the amount withdrawn. The Roth IRA may be advisable for individuals who expect to be in a higher tax bracket during retirement than they are in the year of contribution. A Roth IRA account does not require minimum distributions at age 70 ½, as compared to a traditional IRA. The only issue is who qualifies for this favorable tax treatment.
Who Qualifies for a Roth IRA
Whether a taxpayer qualifies for a Roth IRA account depends on if he is covered by a pension plan at work and his income levels are below a certain threshold to contribute the maximum amount. For individuals who are single covered by a pension plan at work with adjusted gross income under $60,000, they are eligible to make a maximum contribution of $5,500 for 2014 tax tear. For married taxpayers, household adjusted gross income (AGI) must be less than $96,000 to be eligible for a maximum contribution of $5,500. For taxpayers who are not covered by a workplace retirement plan household AGI must be under $181,000 to qualify for the maximum $5,500 annual contribution.
Roth IRA is Not for Everyone
A Roth IRA is not for everyone. For many taxpayers, their participation in a pension at work and level of income prohibits them from participation in a Roth IRA. Most taxpayers expect to have a lower tax bracket during retirement years than they currently have during their working years. The disparity in income tax rates is a major reason why taxpayers who qualify choose a Roth IRA to fund their retirement income needs.
Roth IRA Can Provide a Legacy to Family
A Roth IRA provides an advantage for taxpayers who want the ability to pass along their retirement account balance to their family income tax free. A traditional IRA requires minimum annual distributions beginning at age 70½, which is designed to draw down the account balance over a taxpayer’s life expectancy. A Roth IRA account does not require minimum withdrawals and allows a taxpayer to pass the entire balance to their family tax free.
