What is a Roth IRA?
In 1997, Congress created a new form of IRA, called a Roth IRA. No deduction is allowed for contributions to a Roth IRA, but qualified distributions are excluded from gross income. This no-deduction, no-income regime is the opposite of that for traditional IRAs, contributions to which are deductible (within limits), but distributions from which are fully taxed.
A Roth IRA is an IRA that the owner designates as a Roth IRA. A Roth IRA is generally subject to the rules for IRAs. For example, traditional and Roth IRAs and their owners are identically affected by the rules treating an IRA as distributing its assets if the IRA engages in a prohibited transaction or the owner borrows against it. The reporting requirements for IRAs also apply to Roth IRAs.
In a lot of respects, a Roth IRA looks a lot like a traditional contributory IRA because annual contribution limits are the same. However, the Roth IRA differs from a traditional IRA in a number of important areas. Firstly, none of the contributions to your Roth IRA are ever deductible on your tax return. Moreover, your ability to make a Roth IRA contribution begins to phase out when your adjusted gross income (AGI) exceeds $166,000 (for joint filers) and $105,000 for single filers. In addition, you are not permitted to make a contribution at all when your AGI exceeds $176,000 (for joint filers) or $120,000 (for single filers).
Note: with a traditional IRA you may make a contribution even if your income is high and you are covered by an employer's plan. However, you may not be able to deduct the contribution on your return.
The main advantage of a Roth IRA is that if you qualify to make contributions, all distributions from the IRA are tax free. Furthermore, unlike traditional IRAs, you may contribute to a Roth IRA for as long as you continue to have earned income (for a traditional IRA - you can't make any contributions after you reach age 70 and 1/2).
Please contact one of our Roth IRA Experts at 800-472-0646 for more information.