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Roth IRA.

In 2010, the Roth IRA permits individuals to make nondeductible contributions to an IRA of up to the lesser of 100% of compensation or $5,000 per year. An additional "catch-up" contribution of $1,000 is allowed for individuals who attain age 50 before the close of the taxable year. Unlike traditional IRAs, contributions may be made after age 70 1/2, and husband and wife may contribute amounts without regard to whether either of them is a participant in another qualified plan as long as there is sufficient compensation. The annual contribution limit is reduced (dollar-for-dollar) by all contributions to a traditional IRA. Also, the maximum yearly contribution is subject to a pro rata phase-out for taxpayers filing jointly with modified adjusted gross incomes between $167,000 and $177,000 (for single taxpayers with modified adjusted gross incomes between $105,000 and $120,000). In contrast, with a traditional IRA if the participant is an active participant in a qualified plan the deductible phase-out limits in 2010 are $89,000 to $109,000 for taxpayers filing jointly and $56,000 to $66,000 for single taxpayers.

As with the traditional IRA, the Roth IRA accumulates tax-deferred. Provided the account has been held for at least five years, distributions are not subject to income taxes if: (1) the owner is at least age 59!; (2) the distribution is made after the owner's death; (3) the distribution is attributable to the owner being disabled; or (4) the distribution is for qualified first-time home buyer expenses (limited to $10,000 for both the owner and specified family members). A 10-percent-penalty tax may apply to the taxable portion of withdrawals that are not qualified. Unlike traditional IRAs, there are no requirements that distributions be started or completed by any particular date, unless the owner dies.

A Roth IRA may generally accept a conversion from a traditional IRA (but for tax years beginning prior to 2010, modified adjusted gross income cannot exceed $100,000). However, distributions in excess of basis from the traditional IRA are included in gross income (but not for purposes of determining modified adjusted gross income).

The following factors might be considered when determining whether for a particular taxpayer the Roth IRA is better than a traditional IRA, or whether to make a taxable rollover to a Roth IRA: (1) the current age of the taxpayer; (2) the taxpayer's current and anticipated future marginal income tax brackets; (3) the taxpayer's need for a current income tax deduction; (4) the availability of other funds to pay the taxes on Roth IRA contributions or rollovers; and (5) anticipated reduction of taxes on Social Security income caused by receiving untaxed IRA income.

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Title Annotation:Chapter 17: planning for retirement
Author:Cady, Donald F.
Publication:Field Guide to Financial Planning
Date:Jan 1, 2010
Previous Article:Individual retirement arrangements (IRAS).
Next Article:Which IRA--Roth or traditional?

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