Your Roth IRA and Retirement
A Roth IRA is a terrific vehicle to boost your retirement savings. While you don’t realize immediate tax deductions for contributions to your retirement savings account, if you meet certain requirements, when you make withdrawals, all your earnings are tax free. Even better, with a Roth IRA, a type of defined contribution plan, you can avoid the early distribution penalty on certain withdrawals, as well as the requirement that you take mandatory minimum distributions after age 70½. Additionally, Roth IRA assets may pass to heirs tax free.
Roth IRA Retirement Savings Contribution Limits
Your contribution limits may change from year to year. In 2010, the Roth IRA retirement savings limits are:
- $5,000 in 2010 if you are married and filing jointly and your modified adjusted gross income is less than $176,000; and
- $5,000 if you file single and your modified adjusted gross income is less than $120,000.
Roth IRA retirement savings contributions are limited to earned income only. So if your earned income during retirement is only $4,000 per year, you can only contribute up to $4,000 to your Roth IRA retirement savings plan.
Additionally, if you’re 50 years or older, you can make an additional catch up contribution of $1,000 in 2010.
While contributions to a Roth IRA retirement savings plan will not reduce your taxable income like a traditional IRA, your distributions will be tax free when you start taking them.
Flexible Retirement Savings Options
Roth IRA retirement savings plans don’t have any set contribution schedule. So long as you meet the April 15 deadline, you can make contributions any time up until that date.
Unlike other retirement savings plans, such as 401(k)s, you can withdraw your Roth IRA contributions without paying a penalty; if you withdraw interest earnings, you may incur a penalty if you do so before age 59 1/2.
You can still contribute to a 401k or 403b plan through your employer, or traditional IRA and also contribute to Roth IRA retirement savings fund.
Converting Retirement Savings Plans to a Roth IRA
You have the option to convert a traditional IRA or 401(k) to a Roth IRA. There are four key issues to consider and you may wish to consult with your tax advisor to see if converting to a Roth IRA retirement savings plan makes sense for your situation.
- Taxes – A Roth IRA conversion is a good idea if you anticipate that your tax rate will be higher in retirement than it is today. If you’re like a lot of people with retirement savings accounts that have lost value over the last few years or if you anticipate having a lower taxable income this year, then you may want to consider a Roth IRA conversion for the taxes on retirement income and savings benefits.
- Time – If you plan to make withdrawals from your converted Roth IRA retirement savings plan within the next five years, you may want to keep your retirement savings where it is. Conversion withdrawals before the five-year mark will incur a 10% penalty.
- Cost – Because the contributions you make to a traditional IRA or a 401(k) are tax-deferred, if you decide to elect a Roth IRA conversion, you’ll need to pay tax on the amounts you convert. If you have the funds available to do so without tapping into your retirement savings, then a Roth IRA conversion may be a good choice.
- Deadline –You have until December 31, 2010 for the 2010 tax year to convert your retirement savings plans into a Roth IRA.
