- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Roth IRAs
A Roth IRA is a type of individual retirement plan in which your contributions are made with after-tax dollars. Because you make contributions with after-tax dollars, your contributions are not tax deductible. However, this plan provides a unique benefit that is not available with any other retirement plan: all earnings and capital gains are tax free when you or your beneficiaries make withdrawals at retirement.
You can contribute to a Roth IRA even if you have an ESRP and even if you are over age seventy and a half. You can contribute up to $4,000 each year in 2007 (see Table 30.1); the maximum contribution amount increases yearly.
The advantage of a Roth IRA is that you can withdraw your initial contributions without incurring taxes or penalties (check your state’s tax rules for more information); however, this benefit does not apply to earnings. Earnings are tax free if your Roth IRA is in place for at least five years and if you are at least fifty-nine and a half when you make withdrawals. You can have both a traditional IRA and a Roth IRA contribution in one year, but you cannot exceed the yearly contribution limits of $4,000 in 2007 to the combined contributions to your traditional and Roth IRAs. With Roth IRAs, you are not required to receive distributions by age seventy and a half.
The disadvantages of a Roth IRA include that there are income limits above which you cannot invest in a Roth IRA (see Table 2), and you must leave investments in your account for at least five years before you can make withdrawals without penalty.
If you make withdrawals before age fifty-nine and a half and you have had the account for less than five years, earnings are subject to ordinary income taxes. Additionally, earnings are subject to an early withdrawal penalty of 10 percent unless you use the money to purchase your first home or to pay for death or disability costs.
If you make withdrawals after age fifty-nine and a half and you have had the account for less than five years, earnings are subject to ordinary income taxes but not early withdrawal penalties.
If you make withdrawals after age fifty-nine and a half and you have had the account for more than five years, all contributions and earnings can be withdrawn tax free. There are no minimum withdrawal requirements.
