|Individual Retirement Accounts can be part of the foundation of a financially secure retirement. For many years, millions of individuals have made annual contributions to IRAs or used them to receive distributions from retirement plans on changing jobs or retiring. A few years ago, a new form of IRA was created called the Roth IRA. The Roth IRA offers some advantages over the traditional IRA but comes with some limitations.
Here is a comparison of some of the key features of each:
For 2016 Roth IRAs, single tax return filers can make full contributions to their Roth IRA if their income is less than $117,000. The limit for joint filers in 2016 is $184,000. Partial contributions are allowed if your income exceeds those amounts (up to $132,000 and $194,000 respectively).
Taxability of Earnings
In addition, workers ages 50 and over can make additional “catch-up” contributions of $1,000 for 2015 and 2016.
Deductibility of Contributions
For 2016 contributions – Single return filers – full deductibility if AGI is $61,000 or less and partial deductibility with AGI up to $71,000. For joint return filers in 2015, the limits are $98,000 and $118,000.
Contributions to a Roth IRA are not tax deductible.
Taxability of Withdrawals
Penalty for Early Withdrawals
Which IRA is right for you?
If your contributions to a traditional IRA would be deductible, the question is harder. Generally, if you are younger, the attraction of tax-free distributions would outweigh the immediate benefit of the deductions. If you expect your marginal tax rates to remain at their current level or increase, the odds favor the Roth IRA.
If you have significant other assets and would like to use your IRA to pass significant wealth on to future generations, the tax-free nature of the Roth IRA is extremely attractive.
Should You Convert Your IRA to a Roth IRA?
Be sure to consult your tax advisor if you believe converting makes sense. Most professionals have software that can help with the analysis.
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