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Roth IRA

A Roth Individual Retirement Account (IRA) is a personal savings plan that offers tax benefits to encourage retirement savings. In 2007, you can contribute up to the lesser of $4,000 ($8,000 if married filing a joint return) or 100 percent of your taxable compensation to a Roth IRA. In 2008, you can contribute up to the lesser of $5,000 (or $10,000 if married filing a joint return) or 100 percent of your taxable compensation to a Roth IRA. In addition, individuals age 50 or older can make an extra "catch-up" contribution of up to $1,000 in 2007 and 2008. Contributions to a Roth IRA are not tax-deductible, but the funds grow tax deferred and distributions are tax-free under certain conditions.

Key Strengths:

  • Qualified distributions are completely tax-free (and penalty-free)
  • You can contribute after age 70½ (as long as you have taxable compensation)
  • You have flexibility in withdrawing your funds prior to retirement
  • You are not required to take any distributions while you are alive
  • Contributions can be made even if you are covered by an employer-sponsored retirement plan
  • IRAs offer a wide range of investment choices
  • $1,000,000 (and in some cases more) of IRA assets are protected in the event of bankruptcy under federal law

How do I become eligible for a Roth IRA?

Generally speaking, eligibility depends on your adjusted gross income (AGI) for a year and your tax filing status. Contrary to a traditional deductible IRA, the income limits apply whether or not you actively participate in an employer's retirement plan. You can contribute the full amount to a Roth IRA:

  • If you are single and your AGI does not exceed $101,000 (partial contributions allowed if AGI is between $101,000-$116,000)
  • If you file jointly and your AGI does not exceed $159,000 (partial contributions allowed if AGI is between $159,000-$169,000)

Coordination with Contributions to Other IRAs

The Roth IRA contribution limit is reduced by any contributions made to other Traditional IRAs by the same individual for the same tax year.

Tax-free Earnings

Even those who are eligible for a tax-deductible IRA should consider a Roth IRA. Depending on your age and tax bracket, tax-free withdrawals in retirement can more than make up for a tax deduction today.

Conversions from Traditional IRAs

  • Distributions from a Traditional IRA may be converted to a Roth IRA without the 10% early distribution penalty tax.
  • The conversion amount is not counted towards the annual contribution limit.
  • Only taxpayers with $100,000 or less AGI (for both single and married) are eligible for conversions.
  • The Tax Increase Prevention and Reconciliation Act of 2005 eliminates the $100,000 AGI ceiling for converting a traditional IRA to a Roth IRA for tax years after 2009.
  • A married taxpayer filing separately is not eligible.
  • The taxable conversion amount is taxed as ordinary income but will not be counted towards the $100,000 AGI threshold.

Contact Morgan Keegan today for more information about our Roth IRAs.