The Roth IRA presents a potentially attractive alternative to
the traditional IRA. That's because a Roth IRA may allow you to
avoid future taxation of any earnings on your retirement funds by
making nondeductible contributions now.
Rules of the Roth IRA
Following is a summary of the rules for Roth IRAs:
Unlike the traditional IRA, contributions to a Roth IRA
are nondeductible regardless of your income level or
participation in a company-sponsored retirement plan.
Your total annual contributions to all IRAs are limited
to $6,000 in 2019. Individuals who are at least 50 years
old by the end of the year are also able to make so-called catch-up
contributions to a Roth IRA. The allowable catch-up contribution is
$1,000 per year but is not adjusted for inflation. The contribution
limit begins to decline or "phase out" for single taxpayers with
modified adjusted gross incomes (MAGIs) of $122,000 or
more and for married couples filing jointly with MAGIs of
$193,000 or more. Individuals with MAGIs of $137,000 or more
($203,000 for married couples filing jointly) are not eligible to
contribute to a Roth IRA for that year. Married taxpayers filing
separately are not allowed to contribute to a Roth IRA if they have
MAGIs of $10,000 or more.
Contribution limits may increase in the years
ahead. In the future, the annual contribution limit may be
adjusted for inflation.
Your contributions to a Roth IRA may continue beyond age
70½. You are not required to start taking
distributions from a Roth IRA at age 70½ as you are with a
traditional IRA, and you can continue to contribute as long as you
have earned income. When a Roth IRA owner dies, however, his or her
heirs must adhere to the same minimum distribution rules that apply
to traditional IRAs.
Qualified distributions from a Roth IRA are tax
free. While your contributions to a Roth IRA are never tax
deductible, your distributions may be tax free if you have owned
the Roth IRA for at least five tax years AND:
- You are at least 59½ years old; or
- Your withdrawal of up to $10,000 (lifetime limit) is applied to
a first-time home purchase; or
- You die or become permanently disabled.
You may qualify for the "first-time home purchase" if you have
not owned a home for at least two years before the date on the
purchase contract or the date when construction started for a
principal residence. You, your spouse, or a child or grandchild or
an ancestor of either may qualify as the buyer.
The taxable portion of a nonqualified distribution may
be subject to a 10% additional tax for early withdrawal.
If you make withdrawals that do not meet the rules for a qualified
distribution, you'll owe regular income taxes on the taxable
portion of the withdrawal. You must also pay a 10% additional tax
on the taxable portion of the withdrawal, unless an exception
Early withdrawals are permitted for qualified education
expenses. If you are under age 59½ but have held
the Roth IRA for five tax years, you may withdraw funds early to
pay for qualified education expenses for yourself or family members
without incurring the 10% additional tax. You will have to pay
income tax on the taxable portion of the distribution, however.
Retirement plan "rollovers" are permitted. If
you are changing jobs or retiring, you can roll over funds from an
employer retirement plan, such as a 401(k) account, directly to a
Roth IRA. The rollover is treated as a conversion, with income
taxes due on the taxable portion of the funds.
The Traditional IRA vs. the Roth IRA
When deciding whether a traditional IRA or a Roth IRA is best
for you, you'll want to compare the after-tax dollars that would be
available to you under each option. This will depend on many
factors, including your tax bracket, how many years you have until
retirement, and when you wish to begin making withdrawals. For some
people, a Roth IRA may result in more after-tax income during
retirement because qualified distributions from a Roth IRA are tax
free, while distributions from a traditional IRA will generally be
For those whose contributions to a traditional IRA are tax
deductible and who are in a higher tax bracket today than they will
be in during retirement, a traditional IRA may be a good
alternative, depending upon their individual circumstances.
If you are not eligible to participate in a company-sponsored
retirement plan, you can make deductible contributions to a
traditional IRA regardless of your income level, up to $6,000 in
2019 (or $7,000 if you are at least 50 years old). Deductible
contributions may be reduced or eliminated if the taxpayer (or
spouse, if filing jointly) participates in a company-sponsored
retirement plan and income exceeds certain levels.
The Traditional IRA
|The traditional IRA may still provide
an advantage over the Roth IRA to those who maximize its benefit.
Here's how: You invest the tax savings from your IRA deduction in a
traditional account each year and let that account grow along with
your IRA. Assuming your tax rate drops in retirement, this could
yield more of a tax-adjusted benefit than a Roth IRA.
Conversion of a Traditional IRA to a Roth IRA
There are no income limits associated with the conversion of a
traditional IRA to a Roth IRA -- anyone can convert, provided they
pay the tax bill. Since any investment earnings in your regular IRA
have not been taxed yet, the government will take its share at the
time of the conversion. If you have made nondeductible
contributions to a traditional IRA, withdrawn earnings -- as well
as any previously untaxed amounts -- will be taxed, but the amount
of any nondeductible contributions will not. The conversion will
not trigger the 10% additional tax usually imposed on early
Which Is Right for You?
If you have a traditional IRA and are considering converting to
a Roth IRA, here are a few factors to consider:
- A Roth IRA may be more attractive the further you are
from retirement. Why? Because the longer your earnings can
grow, the more potential income you may have that is never
taxed. On the other hand, if you convert to a Roth IRA close to
retirement, your investments may not have much time to compensate
for the associated tax bill.
- If your traditional IRA contributions are
nondeductible, you may be better off with a Roth IRA.
That's because the distributions of earnings from your traditional,
nondeductible IRA will eventually be taxed. The qualified
distributions from a Roth IRA will not.
- Your current and future tax brackets will affect which
IRA is best for you. For example, if you are currently in
a high tax bracket and expect to be in a much lower tax bracket
during retirement, a traditional IRA could be the best option. Why?
Because you may be able to claim a deduction on your contributions
now and then pay taxes on future distributions at the lower rate
As you can see, there is no easy answer to the question, "Which
IRA is best for me?" As with any major financial decision, careful
consultation with a tax professional is a good idea before you make
your choice. In addition to helping you with calculations and
projections, a tax professional will know what, if any, changes or
clarifications have been made to the complex tax laws that apply to
Roth IRAs. Remember, your retirement could last 20 years or more.
How you live tomorrow could depend on the choices you make
The information contained herein is general in nature and is
not meant as tax advice. Consult a tax professional as to how this
information applies to your situation.